On 7 October 2020, the IRS issued final regulations on the withholding rules for transfers of partnership interests by foreign transferors.

A gain on the sale or disposition by a non-US partner of an interest in a partnership that engaged in a US trade or business may be taxed as US trade or business income. These sales or dispositions are subject to withholding tax under section 1446(f). The final regulations now set out the section 1446(f) withholding rules.

For non-publicly traded partnerships, the transferee is responsible for withholding, except in certain limited situations where the partnership is responsible. In the case of publicly traded partnerships (PTPs) the broker is responsible for withholding.

When a foreign person sells or disposes of a partnership interest, the responsible person is required to withhold tax of 10% of the amount arising on the transfer.

Exceptions from Withholding

The exceptions to the obligation to withhold generally depend on factors such as the residential status of the taxpayer; the part of the gain that is effectively connected to the US business; and benefits arising from the provisions of tax treaties. An exception applies if the broker or the customer is a US person as evidenced by Form W-9. A claim for exemption may be made under a US double tax treaty, evidenced by Form W-8BEN or by form W-8BEN-E. A claim may also be made by a foreign dealer operating through a US branch, if Form W-8EC1 is provided. An exception can also apply if the PTP can provide a notice showing that there is a less than 10% effectively connected gain.

Entry into Force

The regulations come into force in relation to PTPs and qualifying intermediaries from 1 January 2022.