PURPOSE:
 
If a partnership with a foreign partner has income that is effectively connected with a US business or trade, it must report a partnership withholding tax. This is done by filing Form 8804 and Form 8805. 
 
What Is Partnership Withholding? 
If a nonresident alien is a partner in a US partnership—or a foreign partnership with effectively connected income (ECI) to a US business of trade—then that partnership must withhold the foreign partner’s share of the ECI. 

Partnerships must pay this withholding tax even if the partnership never makes any cash distributions to the foreign partner, and regardless of the foreign partners’ ultimate US tax liability. The good news is that the withholding tax does not apply to any income that isn’t effectively connected to a US business or trade. 
 
What Is the Withholding Rate for Partnerships with a Foreign Partner? 
The standard withholding rates are: 
21% for corporate foreign partners 
37% for non-corporate foreign partners 
 
However, because the US has entered into tax treaties with some countries, the
rate may be lower for some foreign partners. An experienced expat accountant can help you calculate the correct rate for your business. 
 
Are There Any Exceptions to Partnership Withholding? 
The IRS does have some exceptions to partnership withholding. For example, it lets foreign partners certify some losses and deductions to the partnership.
 
Foreign partners may also certify that their partnership investment will be the only way they contribute to the ECI during that tax year. 
In the event of these certifications, the partnership won’t be required to pay a withholding tax for the foreign partner as long as the estimated annualized or actual tax due is less than $1,000. 
 
However, even if no withholding tax is due, the partnership must still report the ECI income of the foreign partner. You can do this with Form 8804 and Form 8805. 
 
What Is Form 8804? 
Form 8804 is an annual summary statement of any Forms 8805 that were sent to foreign partners. The partnership must complete Form 8804 and attach a copy of every foreign partner’s 8805—again, even if no withholding tax is paid. 
 
What Is Form 8805? 
Form 8805 reports the amount of ECI allocated to a foreign partner. The partnership must send a completed copy of this form to all foreign partners involved, even if no withholding tax is paid.