The IRS issued final regulations (T.D. 9926
) on Oct. 8 regarding withholding and reporting obligations with respect to certain dispositions of partnership interests by foreign persons.
Sections 864(c)(8) and 1446(f) were initially enacted by the Tax Cuts and Jobs Act. Section 1446(f) requires withholding on such dispositions to the extent that there is any gain that would be treated as effectively connected with the conduct of a U.S. trade or business (ECI). Section 864(c)(8) provides that a foreign person’s gain or loss from the sale or exchange of a partnership interest will be classified as ECI 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. Section 1446(f) imposes a 10% withholding tax on the amount realized in a disposition of a partnership interest that generates gain treated as ECI under Section 864(c)(8). For more details on the Section 864(c)(8) final regulations, see our prior coverage
The IRS previously issued guidance under Section 1446(f) in Notice 2018-29 and in proposed regulations issued on May 13, 2019. For more details, see our previous coverage
Generally, the final regulations retain the overall mechanics of the proposed rules requiring withholding on the transfer of a partnership interest. The presumption that a transfer is subject to withholding is required unless the transferee obtains a certification from the transferor establishing that no withholding is required. Under the final regulations, minor modifications were made to allow transferees, rather than the partnership, to obtain a refund of overwithholding, if any.
In regard to non-publicly traded partnerships, the final regulations modify certain withholding exceptions, such as when a transferor certifies a transferee that the transfer of a partnership interest would not result in any realized gain (the “no gain exception”), including ordinary income arising from the application of Section 751. Transferors generally must obtain information from the partnership to make this certification. While partnerships were generally required under the proposed regulations to provide this information on Form 8308, “Report of a Sale or Exchange of Certain Partnership Interests,” there was no requirement that it be provided by the time of the transfer. Hence, there would be certain circumstances where a partner was unable to make the requisite certification to take advantage of the no-gain exception. The final regulations address this problem by providing that a transferor may rely on a certification from the partnership stating that, as of the determination date, the transfer of the partnership interest would not result in any ordinary income arising from the application of Section 751.
The regulations also generally provide an exception from withholding where a partnership can certify that a hypothetical sale would result in zero or less than 10% effectively connected gain. The final rules clarify that taxpayers should reference gross amounts of income instead of net amounts of income when determining whether the transferor’s distributive share of ECI was less than 10% of the transferor’s total distributive share of income from the partnership. This clarification provides a more accurate proxy for the tax consequences.
Additionally, the final regulations address rules surrounding withholding on transfers of publicly traded partnership (PTP). One item of significance is the addition of an exception for certain partnerships that are not considered to be engaged in a U.S. trade or business. Under this exception, if any partnership certifies that it has not been engaged (directly or indirectly) in a U.S. trade or business in its current taxable year, a transfer of an interest in the partnership will not be subject to Section 1446(f) withholding regardless of whether (or how much) effectively connected gain would be realized in a sale of the United States real property interests held by the partnership.
Generally, these regulations have an applicability date of 60 days after the final regulations are published in the Federal Register. However, certain provisions, such as those pertaining to PTPs and a partnership’s residual withholding obligation, go into effect for transfers taking place on or after Jan. 1, 2022. As of the date of this article, the final regulations are still pending publication in the Federal Register. The version issued on Oct. 8, 2020, may vary slightly from the official document once published.
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