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What are the tax ramifications of having a foreign (UK) partner in an LLC?

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Topic Expert
Marc Schwartz
Title: Partner
Company: Schwartz International
(Partner, Schwartz International) |

If LLC is taxed as a partnership, then LLC must of course file a US partnership tax return - Form 1065. Having a foreign partner complicates issues because LLC must withhold quarterly on the UK partner's distributive share of income via the Section 1446 regulations for federal income tax and, depending on the state where the LLC has operations, there may be state withholding. LLC will issue a Schedule K-1 to the UK partner, which the partner will use as the basis for filing a US federal income tax return. [Note: I am assuming the UK partner is considered a taxpayer and would be the one filing a US return. If it is a flow-through vehicle for US purposes, its owner may be considered the US taxpayer.] The 1446 withholding is often greater than the actual tax liabilty and the UK partner will typically need to request a refund.

There is annual reporting of the withheld amounts both to the partner and to the IRS. Also, if UK partner is a corporation for US tax purposes, the branch taxes will apply. The above also assumes LLC operates a business in the US.

Bottom line, having a US tax partnership with a non-US partner carries a heavier compliance burden that can negatively impact both the partnership and non-US partner.

If LLC is taxed as a corporation, then the above issues do not apply. I'd be pleased to discuss any of the above in more detail offline.

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