A Basic U.S. Tax Compliance Guide for Investing Through a Delaware Limited Partnership (For non-U.S. investors)
Financial investments through U.S. limited partnerships are common, and they are often used to access private equity, real estate, private credit, and other strategies that are typically less accessible to individual investors. Thanks to the flexibility of U.S. entity law, many of these investment vehicles are structured as limited partnerships formed in Delaware (a “Delaware LP”). These partnerships generally operate as pooling vehicles (often effectively “unregulated funds”) that raise capital from investors worldwide and allocate income, gains, deductions, and credits to partners under the U.S. “pass-through” tax regime.
In a typical structure, investors acquire limited partner interests, while the investment manager (or an affiliated entity) serves as the general partner. Under Delaware law, limited partners generally benefit from limited liability, while the general partner has broader management authority and bears responsibility for the partnership’s obligations (subject to the specifics of the structure and agreements). The limited partnership agreement is critical: it governs economic allocations, distributions, and many investor rights—often with significant flexibility—so it should always be reviewed carefully before investing.
Do non-U.S. investors always have to file a U.S. tax return?
It depends.
Because a partnership is generally treated as a pass-through entity for U.S. federal income tax purposes, each partner is typically treated as earning its share of the partnership’s income. The key question is whether the partnership is considered engaged in a U.S. trade or business (USTB). If it is, the partnership’s income is often effectively connected income (ECI), and a non-U.S. investor will usually have a U.S. filing obligation:
Nonresident alien individuals: typically file Form 1040-NR
Foreign corporations: typically file Form 1120-F
If the partnership is not engaged in a USTB, non-U.S. investors may have no U.S. return-filing obligation, because the partnership’s income may be:
Foreign-source income (generally not taxable to a foreign person for U.S. purposes), or
U.S.-source FDAP income (e.g., certain interest/dividends/royalties), for which tax is typically collected via withholding at source (often 30%, subject to treaty reductions).
How can a non-U.S. investor know whether a U.S. return is required?
The primary document is Schedule K-1, which reports each partner’s share of the partnership’s tax items for the year. Many partnerships also provide Schedules K-2 / K-3 when international tax items are present.
Timing note: partnerships generally must furnish K-1s to partners by the due date of Form 1065 (often March 15 for calendar-year partnerships), but partnerships can extend their filing deadline (often to September 15), which can also affect when K-1s are delivered.
What to look for:
If the K-1 shows ordinary business income (loss) and the underlying activity is treated as ECI, that is a strong indicator a U.S. return is required.
The “U.S. vs foreign” character of items can sometimes be clarified in supplemental statements or, where applicable, Schedule K-3.
Special situations can change the analysis (for example, certain U.S. real estate structures and dispositions can trigger distinct withholding and filing rules), so professional review is prudent—especially when the partnership invests in U.S. real property.
Also, if the partnership has ECI allocable to foreign partners, it is generally required to withhold under Internal Revenue Code Section 1446 at the applicable highest rate (often cited at 37% for individuals and 21% for corporations, depending on the year and facts). This withholding is often a practical “red flag” that a return filing will be needed to reconcile the final tax liability.
What is the filing deadline for Form 1040-NR (if a return is required)?
The deadline depends on whether the nonresident alien had U.S. wages subject to withholding:
If you had U.S. wages subject to withholding: generally April 15 (for calendar-year taxpayers).
If you did not have U.S. wages subject to withholding: generally June 15 (for calendar-year taxpayers).
An extension to file is typically available (commonly via Form 4868 for individuals), but an extension to file is not an extension to pay.
Do you need to file even if the Delaware LP allocated a loss?
Often, yes.
If the partnership is engaged in a U.S. trade or business and allocates ECI items to a foreign partner, filing may be required even if the net result is a loss. Filing can also be beneficial because properly reported losses may be available to offset future income (subject to limitations and the taxpayer’s facts). If you don’t file when required, you can lose strategic positions (e.g., loss of deductions against future taxable income) and potentially expose yourself to compliance issues.
How can a non-U.S. investor obtain an ITIN?
A nonresident alien who must file a U.S. federal income tax return and does not qualify for an SSN will generally need an ITIN (Individual Taxpayer Identification Number).
A common approach is:
File Form W-7 together with the Form 1040-NR (typically by mail), unless you qualify for an exception that allows a standalone W-7.
Provide required identification documentation. The IRS generally requires either the original passport or an acceptable certified copy (e.g., certified by the issuing agency), unless you use a Certifying Acceptance Agent (CAA) who can verify documents and help you avoid mailing original passports.
How can a non-U.S. investor receive a refund from the IRS?
Refund situations are common when withholding exceeds the investor’s actual U.S. tax liability—often in real estate and ECI contexts due to high withholding rates. To claim a refund, the investor typically files the required return (e.g., 1040-NR) and reports the withholding as a prepayment.
From a practical standpoint:
Having a U.S. bank account is strongly recommended to avoid common mailing issues related to checks;
Some U.S. banks may allow remote account opening with an ITIN, depending on their onboarding policies and the investor’s profile.
Summary
· Delaware limited partnerships (LPs) are commonly used as pooling vehicles for foreign and domestic investors to access U.S. private equity, real estate, and private credit, with profits/losses generally passed through to partners.
· Non-U.S. investors file a U.S. return only in certain cases: the key trigger is whether the LP is engaged in a U.S. trade or business, which can create effectively connected income (ECI) reportable on Form 1040-NR(individuals) or Form 1120-F (foreign corporations).
· If the LP is not engaged in a U.S. trade or business, income is often foreign-source (generally not taxable to foreign persons) or U.S.-source FDAP (generally handled via withholding at source), so a U.S. return may not be required.
· Investors usually determine their reporting position by reviewing the annual Schedule K-1 (and sometimes K-3), which breaks out the partner’s share of income items and their character.
· 1040-NR deadlines: typically June 15 for NRAs without U.S. wages subject to withholding (and April 15 if they had such wages); extensions may be available.
· Even if allocated a loss, a filing may still be required when the LP has ECI, and filing can preserve losses for potential carryforward.
· NRAs who must file typically need an ITIN, often requested by attaching Form W-7 to the first 1040-NR (with passport verification via consulate/issuing agency certified copy or a CAA).
· Refunds can arise when withholding on ECI exceeds actual tax; filing the U.S. return is how the investor claims a refund.
If you want to obtain professional tax advice on your U.S. tax filing requirements, do not hesitate to contact Andrea Ricci CPA (CPA License # 57269 issued by the Washington State Board of Accountancy).
