Proposed regulations cover withholding, reporting of partnerships with foreign partners

Tax Hot Topics newsletterThe IRS issued proposed regulations (REG-105476-18) on May 7, 2019, implementing Section 1446(f), which requires withholding of tax and information reporting with respect to certain dispositions by foreign persons of interests in partnerships engaged in the conduct of a trade or business within the United States.

The Tax Cuts and Jobs Act enacted Sections 864(c)(8) and 1446(f). Section 864(c)(8) provides that gain or loss of a nonresident alien individual or foreign corporation from the sale, exchange, or other disposition of a partnership interest is treated as effectively connected with the conduct of a U.S. trade or business to the extent that the transferor would have had effectively connected gain or loss if the partnership had sold all of its assets at fair market value as of the date of the sale or exchange. See our prior coverage on the proposed regulations issued under Section 864(c)(8) here.

Section 1446(f) implemented withholding and information reporting in relation to gain or loss realized under Section 864(c)(8). Among other things, it requires that a transferee withholds 10% of the amount realized by a foreign transferor on a disposition of a partnership interest occurring after Dec. 31, 2017, to the extent that the foreign transferor recognizes a gain that is treated as effectively connected with the conduct of a trade or business within the United States as provided in Section 864(c)(8).

In general, the proposed regulations implementing Section 1446(f) affect certain foreign persons that recognize gain or loss from the sale or exchange of an interest in a partnership that is engaged in the conduct of a trade or business within the United States, and persons that acquire those interests. The proposed regulations also affect partnerships that, directly or indirectly, have foreign persons as partners.

The proposed regulations alter and refine the initial guidance and procedures provided in Notice 2018-29 and, when finalized, would end the suspension of withholding procedures on transfers of publicly traded partnership interests provided in Notice 2018-08. The proposed regulations also provide new procedures and guidance not contained in Notice 2018-29.

The proposed regulations contain detailed rules and guidance, including:

  • Rules for withholding, reporting, and paying tax under Section 1446(f) upon the sale, exchange, or other disposition of an interest in a partnership described in Section 864(c)(8) and Prop. Treas. Reg. Sec. 1.864(c)(8)–1
  • Numerous exceptions to withholding and other rules that were previously described in Notice 2018–29
  • Rules clarifying the reporting rules applicable to transfers of partnership interests subject to Section 6050K
  • Rules relating to Section 864(c)(8) and rules implementing withholding under Section 1446(f)(4) (i.e., secondary withholding tax requirements, which apply to partnership distributions made to the transferee of a partnership interest if the transferee failed to properly withhold)
  • Rules implementing withholding by brokers on transfers of certain interests in publicly traded partnerships subject to Section 1446(f)(1), and which make related changes to the reporting rules and procedures for adjusting withholding under Sections 1461, 1463, and 1464

The proposed regulations become effective on various dates depending upon the specific provision. Notification requirements apply to transfers occurring on or after the date the proposed regulations are published in the federal register. Documentation of U.S. status would apply to certifications made on or after May 7, 2019, but taxpayers may rely on these rules prior to this date. Many of the other rules would generally apply 60 days after the regulations are finalized. The IRS also intends to obsolete Notices 2018-08 and 2018-29 effective on the date that is 60 days after the regulations are finalized.

David Sites
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Mike Del Medico
Washington National Tax Office
T +1 202 521 1522

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.