Definition
Foreign Partner Withholding
US tax withheld at source on income allocated to a non-US partner in an SPV.
US partnerships must withhold tax on income allocable to foreign partners, and the rules that apply depend on the character of the income. Fixed, determinable, annual or periodical income such as dividends and interest is generally subject to withholding at 30% under chapter 3, reducible by treaty where a valid W-8 is on file. Income effectively connected with a US trade or business is withheld under section 1446 at the partner's applicable rate, and a separate regime under section 1446(f) applies to the transfer of a partnership interest. For a typical venture SPV holding non-dividend-paying stock, there is often little to withhold on until a disposition. That is why the question surfaces late, at exit, when the amounts are large.