Highly anticipated proposed regulations have been issued on the withholding required with respect to the disposition of certain partnership interests. The proposed regulations affect certain foreign persons that recognize gain or loss on the disposition of an interest in a partnership that is engaged in a trade or business in the United States, and persons that acquire those interests. Also affected are partnerships that directly or indirectly have foreign partners.
Gain or loss from the disposition of a partnership interest is treated as income effectively connected to a U.S. trade or business, to the extent that there would have been effectively connected income to the foreign partner, if the partnership assets were sold under Code sec. 864(c)(8). The withholding rules of Code Sec. 1446(f) require 10 percent withholding on the amount realized on the disposition, absent certification that the transferor is not a nonresident alien or foreign corporation.
The proposed regulations are a companion to Proposed Reg. 1.864(c)(8)-1 issued in December 2018, on gain or loss by foreign persons on the disposition of a partnership interest.
Reporting, Withholding and Paying Tax
The proposed regulations provide rules for withholding, reporting and paying tax upon the disposition of a partnership interest in a partnership described in Code Sec. 864(c)(8) and Proposed Reg. 1.864(c)(8)-1. The proposed regulations adopt much of the temporary guidance issued in Notice 2018-29, I.R.B. 2018-16, 495, which looked to the rules for withholding on dispositions of U.S. real property interests by foreign persons in Code Sec. 1445.
The proposed regulations also:
- clarify the reporting rules for transfers of partnership interests under Code Sec. 6050(k),
- provide rules for implementing withholding by brokers on transfers of certain interests in publicly traded partnerships,
- make changes to withholding rules for distributions by publicly traded partnerships,
- make changes to reporting rules and procedures for adjusting withholding; and
- provide coordination rules to prevent overwithholding.
A transferee is required to report and pay any tax withheld by the 20th day after the date of the transfer. Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.
The proposed regulations also provide rules that address a partnership’s requirement to withhold if the transferee fails to withhold.
General Rule and Exceptions
A transferee of a partnership interest must withhold a tax equal to 10 percent of the amount realized on any transfer of a partnership interest (other than certain publicly traded partnership interests), if the gain is treated as effectively connected income.
There are six exceptions to withholding under the proposed regulations:
- certification by transferor of non-foreign status,
- certification by transferor that no gain is realized on transfer by transferor,
- certification by partnership that effectively connected gain from the disposition would be less than 10 percent,
- certification by transferor that for prior three tax years its effectively connected taxable income for each year was less than 10 percent of its total distributive share of net partnership income for the year;
- certification by transferor that a nonrecognition provision applies, and
- certification by transferor that a treaty provision applies.
Publicly Traded Partnership Interests
The proposed regulations provide rules for withholding and reporting on the transfer of an interest in a publicly traded partnership (a PTP interest). The withholding obligation is generally limited to brokers that receive proceeds from the sale and act on behalf of the transferor. Once the proposed regulations are final, the suspension on withholding on a PTP interest in Notice 2018-08, I.R.B. 2018-7, 352, will end.
A foreign partner that transfers its partnership interest will need information from the partnership to compute its tax liability based on the deemed sale. Rules are provided that will facilitate the transfer of information between a foreign partner and partnership for purposes of Code Sec. 864(c)(8).