Find Your Specialist


Contact Us

    Go Back

    Proposed Regulations on Transfers by Foreign Partners

    Partnerships Doing Business in U.S. Must Withhold Tax When Foreign Partner Leaves

    When Congress moved the U.S. to a modified territorial tax system, it also put in place compliance measures designed to make sure that income generated within U.S. borders does not escape taxation. Section 1446(f) is one of those provisions. It requires withholding on dispositions of partnership interests by foreign persons where the partnership has U.S. business activities. The IRS has proposed regulations that require withholding of tax on non-U.S. partners that recognize gain or loss from the sale or exchange of an interest in these partnerships.

    10% Withholding

    Specifically, the rules require the transferee to deduct and withhold a tax equal to 10% of the amount realized on the disposition of a partnership interest if the gain would be treated as effectively connected with the conduct of a U.S. trade or business. Also, the foreign transferor must notify the partnership within 30 days of the transfer by providing a statement that includes information the partnership needs to calculate possible gain and loss.

    No withholding is required, however, if the transferor furnishes an affidavit to the transferee giving the transferor’s U.S. taxpayer identification number and stating that the transferor is not a foreign person. The regulations also allow the transferor or transferee to request that a reduced amount be withheld, instead of the 10%. If a transferee fails to withhold the required amount, then the partnership must deduct and withhold from the transferee’s distributions an amount equal to the amount the transferee failed to withhold, plus interest.

    The new rules have a retroactive element which requires partnerships to withhold on partnership interests previously transferred by a non-U.S. partner if the correct tax was not withheld at the time of the transfer.

    Publicly Traded Partnerships

    Publicly traded partnerships (PTPs) also are affected by the new regulations. Banks, brokers, and custodians now will have to withhold on transfers by foreign persons of their interests in PTPs. Previously, the withholding requirement on PTPs had been suspended. The regulations reactivate it. The regulations also make changes to the rules that apply to notice requirements and to those acting as nominees and withholding agents for PTPs.

    The regulations are only proposed at this point, and the IRS is requesting comments by mid-July 2019. The regulations could be finalized after that time and could incorporate suggestions made by those who submit comments.

    Related Articles

    Privacy Overview

    When you use or access the Site, we use cookies, device identifiers, and similar technologies such as pixels, web beacons, and local storage to collect information about how you use the Site. We process the information collected through such technologies, which may include Personal Information, to help operate certain features of the Site (e.g., to prevent online poll participants from voting more than once), to enhance your experience through personalization, and to help us better understand the features of the Site that you and other users are most interested in.

    You can enable or disable our use of cookies per category.
    Always Enabled