In the US, state law regulates the internal governance and operations of a partnership. Although there are 50 states, the laws regulating partnerships are generally quite similar as they are based on the same set of rules (i.e. UPA, RUPA and ULPA). A partnership can be established by formal decision but can also exist due to the mere undertaking of carrying on a business or trade with another person. There are different types of partnerships that depend on the various degrees of liability protection afforded to the partners (e.g. general partnership, limited partnership, limited liability partnership (LLP) or limited liability company (LLC). An LLC with at least two members is classified by default as a ‘partnership’ for US Federal Tax purposes.
A partnership is a type of ‘pass-through’-entity for US tax purposes and is therefore ‘fiscally transparent’. The partnership is never separately taxed on the income it generates. Instead, the individual partners are taxed on their share of the partnership profits, regardless of when the earnings are distributed. Partnerships are required to report their income on an annual tax return (Form 1065) and need to provide each partner with a report of their distributive share of partnership income (Schedule K-1). If the individual partner is a US taxpayer, they need to report income tax and self-employment taxes in the US (Form 1040).
Because countries take different views as to when an entity is ‘fiscally transparent’, international tax issues may arise. Generally, a fiscally transparent entity is not entitled to claim tax treaty benefits, which can result in either double taxation or double non-taxation when earnings are distributed to a beneficiary abroad. For Belgium, the tax treatment will depend on whether the US partnership is deemed to have legal personality or not. This requires a case-by-case study.
If you are partner in a US partnership and you are a Belgian tax resident, you obviously want to know how your US earnings will be taxed in Belgium. Except for a few Belgian tax rulings, the authorities provide little administrative guidance on the Belgian tax treatment of US partnerships.
If the partnership is ‘fiscally transparent’ in Belgium, the earnings are deemed to have been realized directly by each individual partner in proportion to their share in the partnership. The Belgian taxman will have to exempt the income only to the extent it can be allocated to the US (based on the US-BE treaty rules). If it can be allocated to Belgium, it will be taxable here.
The US partnership that is considered to be a separate legal entity in Belgium, will not trigger any personal taxation, if the earnings are reserved and not distributed to the partner. If the partnership does make a distribution, it is generally upheld that the Belgian resident partner is entitled to claim the US-BE tax treaty benefits. Only when the partnership earnings have effectively been taxed in the US, Belgium must exempt the income. In the absence of a taxation in the US, the partnership distribution will be taxable in Belgium instead.
TAXPATRIA® can assist you with analyzing the Belgian tax liability of your US partnership and make sure you are fully compliant with local regulations.