Foreign corporation taxes

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Dear Tax Talk,
A foreign corporation has a 30-percent ownership in a Florida LLC, and is one of three members. The LLC will file a partnership return for 2008.

Will the Florida LLC be required to give a Schedule K-1 to the foreign corporation, and if so, will there need to be a Tax ID for the foreign corporation? If the answer is yes, will the foreign corporation need to be registered in the state of Florida or would it apply for an individual tax identification number (ITIN)?
— Dan

Dear Dan,
A partnership with foreign partners has special tax considerations. First off, as you note, the foreign corporation will need to obtain a tax identification number. An ITIN is for an individual tax identification number.

Since the partner is foreign corporation and not an individual, it needs an employer identification number (EIN). If a principal officer of the foreign corporation has a tax identification number (ITIN, Social Security number or EIN), the foreign corporation can apply online for its own number. Otherwise, you may want to check with your accountant for the current procedures for obtaining the tax identification number for a foreign corporation when the principal officer does not have a tax identification number.

The general rule is that a foreign corporation that is only a partner does not need to register to do business in Florida. It can still obtain an EIN without registering.

The LLC that is treated as a partnership for tax purposes has an obligation to withhold tax at the rate of 35 percent on income allocated to the foreign corporation. The 35 percent is a flat rate that applies to ordinary income of the business; lower rates may apply to certain types of income allocated to foreign partners that are not corporations. 

The tax is due on the fifteenth day of the fourth, sixth, ninth and twelfth month of the partnership’s tax year, based on the income earned prior to those dates. The partnership is required to file forms that are part of a series: Forms 8804, 8805 and 8813. Failure to file these forms will result in automatic assessments and penalties.

For example, I had the unpleasant surprise of a client receiving a bill for Form 8804 taxes based on the information submitted on his annual Form 1065. The tax had been taken care of by the time they received the notice but it was quite a chore to get the IRS to remove the penalties. I have also learned that the IRS wants you to file Form 8804 even if the partnership had a loss.

The whole withholding scheme is complex, and since the penalties are quite stiff, I suggest you check with your accountant before the tax year starts. If you wait until the end of the year, you may already have penalties.

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.