Indian entities and U.S. taxation: U.S. partnerships
The flow through framework for partnerships in the U.S. means that the taxes are applied to partners rather than a partnership entity. It is in contrast to the concept of partnership under Indian tax law where taxes apply at partnership entity level than the partners. Indian investors or entities should be mindful of the form or constitution of the entity they choose to do business in the U.S. as the federal and state tax treatment under the U.S. tax law is different from Indian tax law.
If a partnership conducts trade or business in the U.S., the federal tax law presumes that the partners are doing such business in the U.S. and casts a responsibility on the partners for any U.S. tax compliance or reporting.
Care must be exercised with respect to the manner in which foreign entities are constituted in the home (i.e. India) versus host (U.S.) jurisdictions. For example, an Indian partnership firm having partners with unlimited liabilities may be treated as a partnership for the U.S. tax purposes. However, an Indian limited liability partnership as the name suggests that partners have limited liability, is treated as a corporation for U.S. tax purposes. This characterization of foreign entities for the U.S. tax purposes changes the tax compliance and reporting obligations in the U.S.
Further, any capital asset like real estate held by a partnership may be construed as held by the foreign partners in the U.S., and a sale of such asset or interest in the partnership by a foreign partner results in meeting U.S. tax compliance and reporting. We have covered this in further detail in our blog: “Is a Nonresident Alien’s Sale of a Partnership Interest a U.S. Trade or Business?”.
For most of the states in the U.S., partnerships are not taxed at entity level akin to the federal tax treatment of flow through entities. However, there are states like Rhode Island offering to allow a flow through entity to elect to be taxed at entity level and its members can claim state tax credit.
The federal and state tax compliance and reporting for partnerships / flow through entities is indirectly met by its partners / members. It is therefore important for business owners to be mindful of their costs in choosing between a partnership or a corporation that is tax efficient and capable to achieve both short and long-term objectives of doing business in the U.S.
For more information, please contact:
Head of US-India Tax Desk