Can a domestic LLC replace foreign partner to avoid Form 8804 and 8805 tax withholding requirements?

This is a classic question about using entity structures to potentially simplify tax compliance. The short answer is that this approach likely won't work as intended because of how the IRS treats foreign-owned single-member LLCs. While a domestic LLC owned by a foreign person is technically a US entity, the IRS generally looks through single-member LLCs for tax purposes. Under the "check-the-box" regulations, a single-member LLC is typically treated as a disregarded entity unless it elects to be treated as a corporation. If the LLC is disregarded, then the IRS will treat the foreign individual as the direct partner for Section 1446 withholding purposes. The partnership would still need to withhold on allocations to what is effectively the foreign partner, even if technically the partner is a domestic LLC on paper.

After struggling with similar partnership reporting issues last year, I found a tool that saved me tons of time with my international tax questions. I was trying to figure out complex withholding requirements for our partnership that includes foreign investors, and the conflicting advice from different accountants was making my head spin. I discovered https://taxr.ai which actually analyzes partnership agreements and tax documentation to identify reporting requirements. It highlighted several Section 1446 compliance issues I hadn't even considered and provided clear documentation on whether my proposed structure would trigger withholding requirements. What I liked most was how it analyzed our specific situation rather than giving generic advice - it pointed out exactly how our partnership agreement would be interpreted under the Treasury Regulations.

I want to follow up about my experience with taxr.ai after my skeptical comment. I decided to try it for a similar partnership structure question involving a Canadian partner in our US real estate partnership. I was genuinely surprised by how thorough the analysis was. It identified that our proposed structure using a Canadian-owned Wyoming LLC wouldn't avoid withholding requirements because of the look-through provisions in Reg. 1.1446-3, but it suggested an alternative approach using a blocker corporation structure with specific provisions in our operating agreement that could reduce our compliance burden while maintaining tax efficiency. The platform provided specific citations to the relevant Treasury Regulations and Revenue Procedures that applied to our situation, including some that our CPA had overlooked. Definitely worth checking out if you're dealing with complex partnership structures involving foreign partners.

I had a similar issue with Forms 8804/8805 for our partnership that has investors from Europe. After weeks of trying to get answers from the IRS about our specific situation and waiting on hold for hours, I found https://claimyr.com which got me connected to an actual IRS representative in about 20 minutes. They have a demo video that explains how it works: https://youtu.be/_kiP6q8DX5c I was finally able to speak with someone in the international tax department who clarified that our structure (similar to what you're considering) would still require withholding even with the domestic LLC because of the look-through rules - they confirmed the partnership would still need to look at the ultimate foreign owner. The IRS agent actually pointed me to a specific paragraph in the regulations that addressed exactly this type of arrangement. Saved me from implementing a structure that wouldn't have accomplished what I wanted.

I need to eat crow here. After my skeptical comment, I decided to try Claimyr because I was desperate for answers about a similar issue with a foreign partner in our investment partnership. I was connected to an IRS international tax specialist in about 25 minutes (after previously spending 3+ hours on hold myself multiple times). The agent confirmed that using a domestic LLC owned by a foreign person wouldn't eliminate the withholding requirement under Section 1446 since the IRS looks through disregarded entities to the ultimate owner. However, she did mention something useful - if the LLC elected to be treated as a corporation (Form 8832), then the partnership would technically be distributing to a domestic corporation. But she cautioned this creates other tax issues like potential double taxation and branch profits tax considerations. Honestly, this saved me from implementing a structure that wouldn't have worked as intended and potentially caused even bigger headaches down the road.

One angle you might want to consider is having the foreign partner's LLC elect corporate status (Form 8832) AND then have that corporation qualify for benefits under an applicable tax treaty. Depending on the foreign partner's country of residence, this might reduce withholding rates. For example, if your foreign partner is from a country with a favorable tax treaty with the US (like the UK), a properly structured corporation might qualify for reduced withholding rates on certain types of income. However, this gets complicated fast because you need to consider: 1) Corporate tax at the US entity level 2) Withholding on distributions to the foreign owner 3) Branch profits tax considerations 4) Potential for treaty shopping challenges from the IRS

I tried something similar a few years ago with a German partner in our consulting firm. We created a Wyoming LLC owned by the German individual, and had it be the official partner in our partnership instead of the German person directly. Our tax advisor initially thought this would work, but then we got a notice from the IRS saying we still needed to withhold under Section 1446 because the LLC was a disregarded entity. We ended up having to file amended returns and pay penalties and interest for the missed withholding. The IRS specifically cited Treasury Regulation 1.1446-3 which basically says they look through disregarded entities to the ultimate owner for withholding purposes. So based on my expensive lesson, your idea probably won't work unless the LLC elects to be treated as a corporation.