IRS Guidance Provides Temporary Relief and Clarifies New Withholding Requirement for Foreign Persons Selling Partnership Interests– September 13, 2018 by Andreana Shengelya

>> For current developments related to this topic, read our June 18, 2019, update: "Courts Confirm Foreign Partner Gain from Disposition of a U.S. Partnership Doesn’t Mean U.S. Tax Liabilities" 

The passing of the Tax Cuts and Jobs Act (TCJA) brought with it new tax ramifications for those selling U.S. partnership interests. Specifically, it created a 10 percent withholding tax on the amount realized when a foreign person sells, exchanges or otherwise disposes of a U.S. partnership interest. The burden of collecting the withholding tax lies with the U.S. person acquiring the interest, or the partnership itself in certain circumstances.
However, as with many areas of the TCJA, the initial regulations weren’t necessarily clear as to how to calculate and comply with the new withholding requirement. Consequently, the IRS has released guidance that not only provides temporary relief to the new rules for some, but also offers critical clarifications. 

New Regs Under Reform

The TCJA laid out the following rules surrounding a sale of U.S. partnership interest by a foreign person or corporation: 

  1. A sale creates ECI. IRS Code Section 864(c)(8) provides that gain or loss to a nonresident alien individual or foreign corporation from the sale, exchange or other disposition of a partnership interest is “effectively connected income” (ECI) to the extent that all or a portion of the gain would have been treated as ECI if the partnership had sold all of its assets at fair market value. Prior to the TCJA, the gain was arguably not ECI and therefore did not affect the U.S. purchaser. The new law is effective for any sale of a U.S. partnership interest by a foreign person on or after November 27, 2017.
  2. New withholding tax on the sale. Under Section 1446(f)(1), the U.S. purchaser of the partnership interest sold by the foreign person must deduct and withhold a 10 percent tax on the amount realized on the sale or exchange, unless the transferor certifies that it is not a foreign person. The new withholding requirement is applicable for any sales, exchanges and dispositions made after December 31, 2017.
  3. Partnership withholding responsibilities. Under Section 1446(f)(4), the partnership must deduct and withhold from any distributions made to the purchaser an amount that would satisfy the withholding requirement, plus interest, in the event the purchaser fails to withhold the tax upon the transfer. 

Notice 2018-08 Suspends 10 Percent Withholding for PTPs

On December 29, 2017, the IRS and Department of the Treasury released Notice 2018-08, which grants a temporary suspension of the 10 percent withholding obligation on the sale of publicly traded partnerships (PTPs) until further regulations or guidance are issued. The Notice did not suspend the treatment of gains or losses as ECI to a foreign partner under Sec. 864(c)(8). The IRS acknowledged that the purchaser of a PTP interest may not be able to determine if the seller is foreign or domestic or whether any portion of the seller’s gain should be treated as ECI.
PTP units are generally held by a broker and transferred through a clearing agent. While brokers could potentially withhold on behalf of the transferee, the brokers have not developed systems and controls around the withholding process given the short timeline between the enactment of the TCJA and the January 1, 2018, implementation of this rule. Once more guidance is issued, the IRS states that withholding will be prospective from the date of the guidance and will include transition rules.
While the PTP Notice did not extend to private companies, the Treasury Department and the IRS did request comments on whether there is a need to have a temporary suspension of the withholding requirements for these partnerships as well. The notice also solicited comments on the application of the withholding requirement, the possible role of brokers and procedures for calculating the withholding amount.   

Notice 2018-29 Clarifies How (and Who Needs) to Comply

On April 2, 2018, the IRS and the Department of the Treasury released Notice 2018-29, which will directly impact the disposition of a private partnership interest. In general, the Notice: 

  • Provides guidance on how a purchaser can comply with the 10 percent withholding requirement under Sec. 1446(f)(1), and
  • Temporarily suspends the partnership withholding requirement under Sec. 1446(f)(4), pending the issuance of further regulations. 

The guidance clarifies that a purchaser required to withhold must follow the same forms and procedures used on the disposition of U.S. real property by a foreign person under Sec. 1445 and related regulations, including the requirement to report and remit withholding within 20 days of a transfer. A purchaser of the partnership interest also must include the statement “Section 1446(f)(1) withholding” at the top of relevant forms.
Notice 2018-29 also clarifies several exceptions that would exempt the purchaser from the withholding requirement altogether: 

  • Certification of non-foreign status. If the transferor is not a foreign person, the withholding tax does not apply to the transaction. The withholding exception can be satisfied by obtaining certifications under Reg. Sec. 1.445-2(b) as modified for specifics under Sec. 1446. A transferor also may submit a Form W-9 to a purchaser with appropriate information to satisfy this requirement, and a purchaser may generally rely on the Form W-9 previously received.
  • Certification of no realized gain. A purchaser can be exempt from the withholding requirement if they received a certification from the transferor stating that the transfer of the interest will not result in realized gain.
  • Certification of less than 25 percent ECI in three prior tax years or less than 25 percent effectively connected gain. A purchaser can be exempt from withholding if they receive a certification that the transferor's ECI is less than 25 percent of the transferor's total income from the partnership in each of the last three years, or that the partnership's ECI is less than 25 percent of the total gain on the deemed sale of all of its assets.
  • Nonrecognition transaction. No withholding is required if the purchaser receives a notice from the transferor that the transfer meets the nonrecognition requirements under Sec. 864(c)(8). 

Notice 2018-29 also discusses specific rules related to the treatment of liabilities and tiered structures, clarifying how the realized amount is calculated when such circumstances are present.
The two notices issued on Section 1446(f) have offered welcome temporary relief to the new 10 percent withholding rules for PTPs and much needed clarification on the basics related to non-PTP withholding. While the partners selling and purchasing PTP units received full relief, even though temporary, non-PTP sales are still subject to withholding as of January 1, 2018. There is still significant uncertainty as to how these withholding rules will apply in practice, but the notices provide interim guidance that taxpayers can rely upon until additional guidance is issued.
Please contact a member of your service team, or contact Andreana Shengelya at or Kim Palmer at for further discussion. 

This item was originally published in the August 2018 issue of The Tax Adviser, an AICPA publication. Read Andreana’s full technical article in The Tax Adviser now.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.