PORTFOLIO

Partners and Partnerships — International Tax Aspects (Portfolio 910)

Tax Management Portfolio, Partners and Partnerships — International Tax Aspects, examines the principal U.S. tax issues that arise in international uses of entities treated as partnerships for U.S. tax purposes, including investments in U.S. partnerships by foreign persons and investments by U.S. persons in foreign partnerships.

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DESCRIPTION

The key issues addressed in this Portfolio include:

  • When is an entity classified as a partnership for U.S. tax purposes? Planning considerations in choosing the appropriate business form for international operations.
  • What is the distinction under the Internal Revenue Code between domestic and foreign partnerships, and between resident and nonresident partnerships? Analysis of the significance of these distinctions in structuring international joint ventures.
  • How does the U.S. tax system treat inbound investment by a foreign person through a U.S. resident partnership? Consideration of the principal tax issues that arise on formation, operation and wind-up of joint venture. Also analysis of the tax consequences of a foreign person's sale or other disposition of his equity interest in a joint venture.
  • What are the principal tax considerations for U.S. persons conducting foreign operations through an entity treated as a partnership for U.S. tax purposes? Special attention is given to former §1491, the replacement provisions and planning considerations for U.S. taxpayers seeking to contribute appreciated assets, or intangible assets, to foreign joint ventures. Also discussed is the interplay of the partnership rules and various rules affecting the taxation of foreign income of U.S. taxpayers, including the income source rules, the foreign tax credit and subpart F.
  • How do the withholding rules apply to domestic and foreign partnerships
  • How do bilateral tax treaties apply to domestic and foreign partnerships and their partners
  • What are the obligations of resident partnerships with foreign partners, and nonresident partnerships with U.S. partners, to file informational returns with the IRS?


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AUTHORS

Partners and Partnerships — International Tax Aspects was authored by the following experts.
PHILIP A. STOFFREGEN
Philip A. Stoffregen, B.A. Earlham College (honors 1973); Ph.D. University of Chicago (Mrs. Giles Whiting Fellow 1979); J.D. University of Chicago Law School (honors 1982); Law Clerk, The Honorable Bruce M. Forester, United States Tax Court; frequent speaker and writer on international tax subjects.

KENNETH L. HARRIS
Kenneth L. Harris, A.B. Hamilton College (summa cum laude 1982, Phi Beta Kappa); J.D. University of Chicago Law School (1985); LL.M. New York University School of Law (1988, Graduate Editor, Tax Law Review); Member of Committee on U.S. Activities of Foreign Taxpayers and Standards of Tax Practice; co-author of Standards of Tax Practice (4th Ed. 1997); frequent speaker and writer on federal tax issues.

FRANCIS J. WIRTZ
Francis J. Wirtz, B.S. (accountancy) University of Illinois (with honors 1975); J.D. University of Michigan Law School (cum laude 1979); certified public accountant; Chairman of Subcommittee on International Taxation of Partnerships, S Corporations and Trusts, Committee on Foreign Activities of U.S. Taxpayers; frequent speaker and writer on federal tax issues.

TABLE OF CONTENTS

Detailed Analysis

I. Introduction

II. Classification

A. Importance of Classification

B. Overview of Classification Scheme

1. Section 7701

2. Publicly Traded Partnerships

C. Check-the-Box Regulations

1. Background

2. The Regulatory Scheme

3. Existence of a Separate Entity

a. In General

b. Activity Level

c. Joining Together

d. Joint Profit Motive

e. Take-in-Kind Provisions

4. Distinguishing Between Entities

5. Single-Owner Business Entities

a. Disregarding the Entity for Tax Purposes

b. Default Rules for Single-Owner Entities

6. Per Se Corporations

7. Special Transition Rules for Existing Foreign Entities on List of Per Se Corporations

8. Default Rules in the Absence of Election

a. Default Rules for Entities Formed on or after January 1, 1997

(1) General Rule

(2) Meaning of Limited Liability

b. Default Rules for Entities in Existence on December 31, 1996

9. Transition Rules for Existing Entities

10. Classification of Foreign Entities Whose Prior Classification Becomes Irrelevant

11. Mechanics of Election; Limits on Changing Election

a. Timing of Election

b. Persons Who May or Must Execute Election for Non-Default Status or Change in Status

c. Restriction on Changing Elections

d. Deemed Elections

12. Tax Consequences of Change in Classification

a. Conversion of Corporation to Partnership

b. Conversion of Partnership to Association

c. Change from Association to Single-Member Disregarded Entity

d. Change from Disregarded Entity to Association.

D. Election Out of Subchapter K

1. Overview

2. Procedure for Complete Exclusion from Subchapter K

3. Partial Exclusion from Subchapter K

4. Limitation on Effect of Election

III. Distinguishing Between Domestic and Foreign Partnerships and Between Resident and Nonresident Partnerships

A. Definition of Foreign and Domestic Partnerships

B. Significance of Domestic/Foreign Distinction

1. Significance of Domestic/Foreign Status to Non-U.S. Investor

2. Significance of Domestic/Foreign Status to U.S. Investor in Foreign Venture

C. Definition of Resident/Nonresident Partnerships

D. Significance of Resident/Nonresident Distinction

IV. U.S. Taxation of Inbound Investment in Partnership Form

A. Overview

1. Subchapter K: Entity vs Aggregate View of Partnerships

2. Overview of Taxation of Foreign Persons Engaged in U.S. Activities

3. The Interplay Between Partnership and International Tax Rules

B. Formation Issues

1. General Rules

2. Contributions by Domestic Partners to Foreign Partnerships

3. Contributions by Foreign Partners to Domestic Partnerships

a. Contribution of Encumbered Property

b. Contribution of U.S. Real Property Interests to a Foreign Partnership

c. Contribution of Services for a Partnership Interest

d. Sale of Property vs. Contribution

C. Taxation of Partnership Operations: Trade or Business Income

1. U.S. Taxation of Effectively Connected Income

a. Trade or Business Requirement

b. Effectively Connected Income

2. Determining Whether a Foreign Partner Is Engaged in a U.S. Trade or Business

a. Imputation of Trade or Business from Partnership to Partner

b. Imputation of Trade or Business From Partner to Partnership

c. Treaty Implications: Permanent Establishment vs. Trade or Business

3. Taxation of Foreign Partner's Share of Partnership's Effectively Connected Income

4. Special Allocations to Foreign Partners of Domestic Partnerships

a. Substantial Economic Effect: § 704(b)

b. Special Allocations to Foreign Partners

5. Foreign Corporate Partners and the Branch Profits Tax

a. Background

b. Foreign Corporate Partners

6. Withholding and Reporting Issues

D. Taxation of Partnership Operations: FDAP and Capital Gain Income

1. Overview of FDAP Regime

2. Taxation of a Foreign Partner's Share of Partnership FDAP Income

3. Taxation of a Foreign Partner's Share of Partnership Capital Gain Income

4. Withholding and Reporting Issues

E. Taxation of Partnership Operations: Current Distributions

1. General Rules

2. Cash Distributions to a Foreign Partner in Excess of the Foreign Partner's Outside Basis

3. Distributions to Foreign Partner of § 751 Property

a. General

b. Impact on Foreign Partners

4. Distribution of Effectively Connected Property

F. Taxation of Partnership Operations: Guaranteed Payments

1. Overview of § 707(c)

2. Source and Character of Guaranteed Payments

a. Payment for Services

b. Payment for Use of Capital

G. Sale or Exchange of Partnership Interest By Foreign Partner

1. Background

2. Rev. Rul. 91-32

a. The IRS Position

b. Criticism of the IRS's Position

c. The Foreign Partner's Interest as ECI Property

d. Adoption of Aggregate Approach

3. Unresolved Issues

a. Disposition by Domestic Partner of Foreign Partnership Interest

b. Distributions in Excess of Outside Basis

V. Outbound Investment in Partnership Form

Introductory Material

A. Acquiring an Interest in a Foreign Partnership Through Contribution, Purchase, or Conversion of an Existing Corporation

1. Section 721 (c)

2. Section 367(d): Transfers of Intangible Property to Foreign Joint Ventures in Partnership Form

3. General Reporting Requirements

4. Reporting Rules for Outbound Transfers of Property

5. Purchase of Interest in Foreign Partnership

6. Conversion of Foreign Corporation to Foreign Partnership

7. Addition of a Second Owner to Foreign Entity Treated as Branch

8. Taxable Year of Foreign Partnership

B. Taxation of U.S. Partners on Income of Foreign Partnerships

1. General Partnership Rules Apply

2. Anti-Abuse Rules

3. Special Allocations of Items of Partnership Income, Expense, and Credit

4. Source of Income

a. Overview

b. Personal Property

c. Inventory

d. Services

e. Foreign Currency Gain

f. Expenses

g. Sale or Exchange of Partnership Interest

5. Foreign Tax Credit

a. Overview

b. Direct Credits

c. Indirect Credits

d. Foreign Tax Credit Limitation

e. Reverse Hybrids

C. Controlled Foreign Corporations

D. Possible Application of § 337(d) to International Tax Planning Using Partnerships

E. Disposition of Foreign Partnership Interest

1. Sale or Exchange

2. Section 708 Termination of a Foreign Partnership

3. Worthlessness of a Partnership Interest

4. Conversion of Foreign Partnership to Foreign Corporation

VI. Withholding

A. Introduction

B. Non-Effectively Connected Income

C. Withholding on Payments to Foreign Partners or Partnerships

1. Overview

2. Exemption for Payments to Domestic Partnership

3. Withholding on FDAP Payments By Domestic Partnership

4. Withholding on Payments of FDAP to Foreign Partnerships

D. Withholding on Dispositions of U.S. Real Property Interests

1. General Rule

2. General Rules of § 1445(e)

3. Disposition of USRPI by U.S. Partnership

4. Distribution of USRPI by U.S. or Foreign Partnership

5. Disposition of Partnership Interest

6. Withholding Certificates

7. Publicly Traded Partnerships

E. Effectively Connected Income

1. General Rule

2. Foreign Partners

3. Effectively Connected Taxable Income

4. Adaptations and Special Rules

a. Estimated Tax Payments

b. Publicly Traded Partnerships

c. Tiered Partnerships

d. Excessive Tax Withholding

e. Effective Date

5. Guidance Under Rev. Proc. 89-31 Before the § 1446 Regulations

VII. Treaties

A. Introduction

B. Issues in the Partnership Context

1. Residency Definition: Who Is Entitled to Treaty Benefits-The Partnership or Its Partners?

2. Limitation on Treaty Benefits for Hybrid Entities

3. Imputation of Permanent Establishment Status

4. Sale of Partnership Interest as Attributable to Permanent Establishment

VIII. Returns

Introductory Material

A. Section 6031: General

1. Form of Return

2. Time and Place of Filing

3. Partner's Identifying Number: § 6109

B. Section 6031: Foreign Partnerships

C. Section 6046A: U.S. Partner's Acquisition, Disposition, or Change of Interest in Foreign Partnership

D. Section 6038: Information With Respect to Certain Foreign Partnerships

E. Sections 6038A and 6038C: Foreign Ownership of U.S. Corporation or U.S. Business

1. Certain Transactions Involving Reporting Corporations

2. Notice of Transfers of Partnership Interests to Foreign Persons

F. Returns with Respect to Transfers and Changes in Interests in Foreign Partnerships

G. Return as Prerequisite to Deduction or Credit: § § 874 and 882


WORKING PAPERS

Working Papers

Table of Worksheets

Other Sources

Worksheet 1 Form 1065 - U.S. Partnership Return of Income

Worksheet 2 Form 8832 - Entity Classification Election

Worksheet 3 Form 8082 - Notice of Inconsistent Treatment or Amended Return (Administrative Adjustment Request (AAR))

Worksheet 4 Reserved

Worksheet 5 Reserved

Worksheet 6 Form 8813 - Partnership Withholding Tax Payment (Section 1446)

Worksheet 7 Form 8865 - Return of U.S. Persons With Respect to Certain Foreign Partnerships

Worksheet 8 IRS Publication 541, Tax Information on Partnerships

Worksheet 9 Rev. Proc. 89-31, 1989-1 C.B. 895

Worksheet 10 Rev. Proc. 92-66, 1992-2 C.B. 428

Worksheet 11 Preambles to 1996 Proposed and Final Check-the-Box Entity Classification Regulations

Worksheet 12 Publicly Traded Partnership Election Relating to Withholding from Foreign Partner

Worksheet 13 Partner's Certification of Non-Foreign Status

Worksheet 14 List of Per Se Foreign Corporations

Bibliography

OFFICIAL

Statutes and Regulations:

Treasury Rulings:

Cases:

UNOFFICIAL

Tax Management Portfolios:

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