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US: Sale of a partnership interest: Withholding tax


The US Treasury and the Internal Revenue Service (IRS) have proposed withholding tax regulations regarding the Tax Cuts and Jobs Act (TCJA) provisions, addressing sales of interests in partnerships engaged in the conduct of a US trade or business.

The US Treasury and the Internal Revenue Service (IRS) have proposed withholding tax regulations regarding the Tax Cuts and Jobs Act (TCJA) provisions, addressing sales of interests in partnerships engaged in the conduct of a US trade or business.

Section 1446(f) provides rules for withholding on the transfer of a partnership interest described in § 864(c)(8). Under § 1446(f)(1), the transferee is required to deduct and withhold a tax equal to 10% of the amount realised on the disposition if a portion of the gain on any disposition of an interest in a partnership would be treated under § 864(c)(8), as effectively connected with the conduct of a trade or business within the US.

Proposed regulations

The proposed regulations would adopt many of the rules that were described in a previous IRS notice (Notice 2018-29) when finalised, with certain helpful modifications provided partly in response to taxpayers comments.

They also provide reporting rules relating to § 864(c)(8) and contain rules clarifying the reporting rules applicable to transfers of partnership interests subject to § 6050K (concerning the application of § 751).

Furthermore, the proposed regulations provide rules implementing withholding by brokers on the transfer of certain interests in publicly-traded partnerships (PTPs) subject to § 1446(f)(1).

Due to the difficulties involved with requiring brokers to timely determine a transferor's share of partnership liabilities, proposed Treas. Reg. § 1.1446(f)-4(c)(2)(i) provides a special rule that treats the amount realised on the transfer of a PTP interest as the amount of gross proceeds paid or credited to the customer or another broker (as applicable).


Because § 864(c)(8) requires a deemed sale at the partnership level to determine a foreign partner's effectively connected gain or loss, a foreign person that transfers its partnership interest will generally not be able to compute its income tax liability under § 864(c)(8), unless the partnership provides certain information to the foreign partner.

The proposed regulations therefore provide rules to facilitate the transfer of information between a foreign partner and the partnership for purposes of § 864(c)(8). They also provide an exception to withholding under § 1446(f)(1) when a transferor certifies that it is not subject to tax on any gain from the transfer, pursuant to an income tax treaty in effect between the US and a foreign country.

This exception applies only when a transferor (as opposed to owners of an interest in the transferor, including partners in a partnership that is a transferor) qualifies for the benefits of an income tax treaty, in order to reduce the burden on a transferee of reviewing documentation from multiple persons.

When a transferor provides a transferee certain information, proposed Treas. Reg. § 1.1446(f)-2(c)(4)(i) allows the transferee to withhold based on the transferor's maximum tax liability on the transfer. The transferor's maximum tax liability is the amount of the transferor's effectively connected gain multiplied by the applicable percentage. See § 1446(b) and Treas. Reg. § 1.1446-3(a)(2). The applicable percentage applies the highest rate of tax for each particular type of income or gain allocable to a foreign person. This undoubtedly will become very helpful.

Proposed Treas. Reg. § 1.1446(f)-5(b) provides important new rules for the liability of agents, which generally require an agent of a transferor (or transferee) to notify the transferee (or other person required to withhold), if it has knowledge that a certification furnished to that person is false.

A person that receives notice from an agent may not rely on the certification to apply an exception to withholding, or for determining the amount to withhold. Proposed Treas. Reg. § 1.1446(f)-5(b)(2) requires the agent to furnish a copy of the notice to the IRS.

An agent that fails to provide the required notice is liable for the tax that the person (that should have received the notice) would have been required to withhold under § 1446(f). However, this liability is limited to the amount of compensation that the agent derives from the transaction (and any civil or criminal penalties that may apply).

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