Rules govern withholding on transfers of partnership interests and ECI

By Sally P. Schreiber, J.D.

The IRS finalized regulations on the operation of Sec. 1446(f), which requires withholding on the transfer of a partnership interest described in Sec. 864(c)(8) (gain or loss of foreign persons from the sale or exchange of certain partnership interests) (T.D. 9926). Sec. 1446(f) was added to the Code by the law known as the Tax Cuts and Jobs Act, P.L. 115-97.

Except as otherwise provided in Sec. 1446(f), Sec. 1446(f)(1) requires the transferee to deduct and withhold a tax equal to 10% of the amount realized on the disposition if a portion of the gain would be treated under Sec. 864(c)(8) as effectively connected with the conduct of a trade or business within the United States (i.e., effectively connected income, or ECI).

The final regulations retain the basic approach and structure of the proposed regulations (REG-105476-18) with certain revisions based on comments received, which are discussed at length in the preamble to the regulations. The final regulations provide guidance on:

  • Reporting requirements for foreign transferors and partnerships with foreign transferors;
  • Definitions and general rules of applicability;
  • Withholding on the transfer of a non-publicly traded partnership interest by a foreign person, including exceptions to withholding;
  • A partnership’s Sec. 1446(f)(4) requirement to withhold on distributions to a transferee;
  • Withholding on the transfer of a publicly traded partnership (PTP) interest by a foreign person;
  • Liability for failure to withhold; and
  • Amendments to existing Sec. 1446 regulations relating to distributions by PTPs.

Final regs. on ECI

The IRS also issued regulations that finalize the rules under Sec. 864(c)(8) that provide guidance for certain foreign persons in determining the gain or loss from the sale or exchange of an interest in a partnership that is treated as effectively connected with a trade or business within the United States, including certain rules that coordinate Sec. 864(c)(8) with other relevant sections of the Code (T.D. 9919, finalizing REG-113604-18).

The final rules retain the basic structure and approach of the proposed regulations, with a few changes in response to comments. The final regulations issued in T.D. 9919 apply to transfers occurring on or after Dec. 26, 2018 (the date the proposed regulations were filed with the Federal Register).

 Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.

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