Prop. regs. to provide withholding relief on sales of foreign PTPs

By Alistair M. Nevius, J.D.

The IRS announced on Wednesday that it intends to issue proposed regulations providing some relief to brokers that are required to withhold on the transfer of an interest in a publicly traded partnership (PTP) (Notice 2023-8). Under the relief provided in the notice, a broker that effects a sale of an interest in a foreign-traded entity can generally presume that the entity is not a PTP for U.S. tax purposes.

Under Sec. 864(c)(8), gain or loss of a foreign person on the sale or exchange of an interest in a partnership engaged in a U.S. trade or business is treated as effectively connected gain or loss and, therefore, is subject to U.S. tax. Under Sec. 1446(f)(1), a transferee of a partnership interest must withhold 10% of the amount realized if any portion of the gain on the disposition would be treated under Sec. 864(c)(8) as effectively connected with the conduct of a trade or business within the United States (unless an exception applies).

In 2020, the IRS issued final regulations (T.D. 9926) that generally require withholding on the sale of a PTP interest unless the PTP represents on a qualified notice that the Regs. Sec. 1.1446(f)-(b)(3)(ii) 10% exception applies, or the transferor provides a certification claiming another exception to withholding under Regs. Sec. 1.1446(f)-4(b). If a broker cannot determine the classification of an entity, it may be required to withhold on each sale of an interest in the entity. (The applicability date of the withholding requirements in the final regulations was delayed to Jan. 1, 2023, in Notice 2021-51.)

Following the publication of the final regulations, people raised concerns regarding the difficulty brokers would have in determining, for withholding purposes under Sec. 1446(f), whether entities organized outside the United States are classified as PTPs for U.S. tax purposes.

In Notice 2023-8, the IRS announced that it intends to issue proposed regulations to provide withholding relief to brokers on the sale of an interest in an entity that is organized outside of the United States and that trades solely on a foreign established securities market or foreign secondary market (foreign-traded entity). The change would allow a broker that effects a sale of an interest in a foreign-traded entity to presume that the entity is not a PTP for U.S. tax purposes unless the broker has actual knowledge otherwise.

However, the IRS in the notice says it would be inappropriate to allow a broker that knows that a foreign-traded entity is a PTP for U.S. tax purposes to presume that the PTP does not have effectively connected income, and therefore the Service says it does not intend to include such a presumption in the proposed regulations. In that case, a broker would be required to withhold under Sec. 1446(f) on the sale of an interest in the PTP unless the PTP has indicated on a qualified notice that the 10% exception applies or the broker receives a certification from the transferor claiming another exception or reduction to withholding.

The proposed regulations will apply to transfers or distributions made on or after Jan. 1, 2023. Until the proposed regulations are issued, a broker that is required to withhold under Sec. 1446(a) or 1446(f) may rely on the provisions of the notice.

— To comment on this article or to suggest an idea for another article, contact Alistair M. Nevius at Alistair.Nevius@aicpa-cima.com.

Tax Insider Articles

DEDUCTIONS

Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.

TAX RELIEF

Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.