Interplay of Withholding Obligations on Partnership’s Disposition of U.S. Real Property

By Jennifer E. Breen, J.D., and Jacqueline Bak, J.D., Washington D.C.

Editor: Annette B. Smith, CPA

Foreign Income & Taxpayers

The Foreign Investment in Real Property Tax Act of 1980, P.L. 96-499 (FIRPTA), subjects a foreign person’s gains and losses from disposition of a U.S. real property interest (USRPI) to U.S. federal income taxation as if those gains or losses were effectively connected with a trade or business within the United States (Sec. 897(a)(1)). Sec. 1445 sets forth the withholding obligations of the parties involved in a foreign person’s disposition of a USRPI. Because a foreign person’s investment in a USRPI may occur indirectly, such as through a partnership, Sec. 1446 withholding requirements also may arise when that partnership has effectively connected income allocable to a foreign partner. It is important to understand when the withholding rules under Secs. 1445 and 1446 are triggered and how these two obligations are coordinated when complying with U.S. withholding and reporting responsibilities.

Sec. 1445 Rules

Generally, Sec. 1445(a) imposes a 10% withholding tax on the gross amount realized on a disposition of a USRPI by a foreign person. For FIRPTA purposes, “disposition” is defined broadly as “any transfer that would constitute a disposition by the transferor for any purpose of the . . . Code and regulations thereunder” (Regs. Sec. 1.897-1(g)). Dispositions meeting this definition include sales of a USRPI by a foreign individual, foreign corporation, or domestic partnership that has a foreign partner and certain distributions by a domestic corporation, real estate investment trust, or regulated investment company to a foreign shareholder. This withholding tax must be withheld by the transferee, unless certain conditions for exemption or reduction of the amount are met, and must be reported and remitted by the transferee no later than the 20th day after the date of the transfer (Regs. Sec. 1.1445-1(c)(1)).

Sec. 1446 Rules

In addition to the Sec. 1445 obligation, the Sec. 1446 withholding rules also may apply in the case of a partnership that receives effectively connected income allocable to its foreign partners. A partnership, foreign or domestic, that has income effectively connected with a U.S. trade or business must pay a withholding tax on its effectively connected taxable income (ECTI) allocable to its foreign partners (Regs. Sec. 1.1446-1(a)). This withholding, which is required whether or not distributions were made during the partnership’s tax year, generally is imposed at the highest corporate tax rate if the foreign partner is a corporation and the highest noncorporate tax rate if the foreign partner is not a corporation (i.e., an individual, partnership, estate, or trust (Sec. 1446(b)(2)). For years beginning after Dec. 31, 2012, the highest rate for noncorporate partners was increased by the American Taxpayer Relief Act of 2012, P.L. 112-240, from 35% to 39.6%, with the highest corporate rate remaining at 35%. Withholding under Sec. 1446 must be paid in estimated installments on or before the 15th day of the fourth, sixth, ninth, and 12th months of the partnership’s tax year (Regs. Sec. 1.1446-3(d)(1)(ii)).

In many instances, the withholding rules of Secs. 1445 and 1446 overlap.

Example: Two foreign individuals, A and B, form a foreign partnership, FP. FP invests entirely in a U.S. corporation, C, which invests entirely in U.S. real property. Throughout the year, C makes distributions to FP that are not paid out of earnings and profits and, to the extent that they exceed the adjusted basis that FP has in C, are subject to U.S. taxation as effectively connected with a U.S. trade or business.

Regardless of whether these distributions exceed the adjusted basis or constitute a return of existing basis, they trigger the obligations of Sec. 1445(e), which requires withholding on a distribution by a domestic corporation to a foreign shareholder. To the extent that the distribution exceeds the adjusted basis, the distribution is considered ECTI and subject to a 39.6% withholding tax under Sec. 1446 at the partnership level, because such amounts are allocable to foreign partners A and B. FP is required to report and remit the withholding to the IRS. Finally, to the extent that FP disposes of a USRPI, Sec. 1445(a) obligations, which require withholding on disposition of the interest, are triggered as well.

Overlap Coordination

When the withholding rules under Secs. 1445 and 1446 overlap, the regulations provide coordination between the two obligations. These coordinating provisions either provide that the rules under Sec. 1446 supersede those of Sec. 1445 or coordinate application of the withholding remittances to the obligations (Regs. Sec. 1.1446-3(c)(2)).

For example, when a foreign partner invests in a domestic partnership that has gain related to the disposition of a USRPI, that partnership is subject only to the withholding requirements of Sec. 1446. If the partnership meets those requirements, it will be deemed to have satisfied the requirements under Sec. 1445. If the partnership withholds any amounts under Sec. 1445, those amounts may be credited to the domestic partnership’s obligations under Sec. 1446 (Regs. Sec. 1.1446-3(c)(2)(i)).

When a foreign partner invests in a foreign partnership, the foreign partnership may credit any amounts withheld during its tax year under Sec. 1445(a) against its Sec. 1446 obligations to the extent that the amounts withheld under Sec. 1445 are allocable to the partnership’s foreign partners (Regs. Sec. 1.1446-3(c)(2)(ii)).

It is important to be mindful of the applicability and interplay of the various withholding obligations that may arise when foreign persons make direct or indirect investments in USRPIs. A party that fails to withhold when required may become liable for the amount of the withholding, as well as penalties and interest under Regs. Sec. 1.1445-1(e)(1) or 1.1446-3(e)(3). In considering these obligations, the parties should consider the administrative aspects of compliance, including the timing of the withholding, remittance, and reporting obligations under Secs. 1445 and 1446, to ensure the obligations are timely and properly met.


Annette Smith is a partner with PwC, Washington National Tax Services, in Washington, D.C.

For additional information about these items, contact Ms. Smith at 202-414-1048 or

Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.

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