Treasury Announces Regs on Withholding of Foreign Partner's Share of Business Income

The final regulations contain changes to the proposed regulations issued on September 3, 2003. The final regulations provide guidance regarding the determination of the domestic or foreign status of partners, a foreign partner's share of partnership income, the calculation of the withholding tax and payment dates, and the application of interest, penalties and additions to the tax when a withholding agent fails to comply with the regulations. The final regulations are effective for partnership taxable years beginning after the issuance of the regulations. However, a partnership may elect to apply the final regulations beginning in an earlier taxable year.

The proposed and temporary regulations provide a special procedure whereby a partnership may consider certain tax and non-tax attributes of a foreign partner when determining its withholding obligation with respect to such partner. The temporary regulations therefore supplement the final regulations and modify a partnership's calculation of its withholding tax obligation in certain instances. The temporary regulations are effective for partnership taxable years beginning after the issuance of the regulations. However, a partnership may elect to apply the temporary regulations beginning in an earlier taxable year if the partnership also makes an election to apply the final regulations beginning on the same date.