On April 2, 2018, the IRS released Notice 2018-29 (the Notice) providing for interim rules with respect to the new Section 1446(f) withholding tax. Congress enacted Section 1446(f) as part of the 2017 Tax Cuts and Jobs Act, effective for transactions closing on or after Nov. 27, 2017. This section confirms that gain realized by a foreign person on the disposition of a partnership interest in a partnership that is engaged in a U.S. trade or business is subject to U.S. income tax to the extent the foreign person would have had effectively-connected income or loss if the partnership sold all of its assets at fair market value. Further, the new law introduces a 10 percent withholding tax on the amount realized by a foreign person upon disposition of certain partnerships that are engaged in a U.S. trade or business. The statute also requires the partnership to withhold from partnership distributions in cases where the transferee failed to withhold the required tax noted above.
The Notice states that transferees of partnership interests should use the Section 1445 withholding tax (e.g., the Foreign Investment in Real Property Tax Act (FIRPTA) withholding tax) rules in the interim until the Treasury and IRS can issue further guidance. This also includes the utilization of FIRPTA withholding tax forms such as the Form 8288 and Form 8288-A. The Notice also clarifies that the transferee is jointly liable for the withholding tax including penalties and interest.
The IRS indicated that there should be no withholding tax required by partnerships on distributions to foreign partners in cases where the transferee failed to withhold tax pursuant to Section 1446 until the IRS issues further guidance.
The Treasury and IRS intend to issue guidance regarding certain exemptions from the withholding when:
- The transferee has received a valid Form W-9 from the transferor
- The transferee receives a certification that no gain is to be realized
- The transferee receives a certification that the transferor’s allocable share of effectively-connected income from the partnership has been less than 25 percent of the transferor’s total distributive share of income from the partnership in the past three tax years
- The transferee receives a certification from the partnership that less than 25 percent of the partnership’s gain is effectively-connected income if the partnership disposed of all of its assets
- The transaction meets certain nonrecognition requirements
The Notice also introduces areas where further guidance will be provided in connection with:
- Determining the amount of partnership liabilities included in the amount realized
- Limiting withholding in certain cases to the transferor’s share of partnership liabilities
- Determining Section 1446(f) withholding on distributions by partnerships
- Coordinating Section 1446(f) withholding with FIRPTA withholding tax rules
- Requiring lower-tier partnerships to furnish effectively-connected income information to their partners
Notice 2018-29 only addresses the withholding tax considerations for exchanges of non-publicly-traded partnership interests. The Treasury previously suspended the withholding tax requirement for publicly-traded partnerships in Notice 2018-08.
