Abstract: The IRS recently issued final rules clarifying withholding requirements for foreign persons who sell or transfer their interests in a partnership conducting a trade or business in the United States. This article provides highlights of those revisions, including reporting requirements and claims for treaty benefits.
The IRS recently issued final rules clarifying withholding requirements for foreign persons who sell or transfer their interest in a partnership conducting a trade or business in the United States. The final regs retain the basic approach and structure of existing proposed regs with certain revisions based on comments received. Here are some highlights of those revisions.
A partnership that’s engaged in a trade or business within the United States, or a partnership that owns (directly or indirectly) an interest in a partnership so engaged, is known as a “USTB partnership.” Generally, a foreign person that transfers an interest in a USTB partnership must notify the partnership within 30 days of the transfer. This person is referred to as a “notifying transferor.”
After receiving the notification from a notifying transferor, a USTB partnership is required to furnish to the notifying transferor the information necessary for him or her to comply with Internal Revenue Code Section 864(c)(8). This notification must occur by the due date on Schedule K-1 (Form 1065), “Partner’s Share of Income, Deductions, Credits, etc.,” for the tax year of the partnership in which the transfer occurred.
The final regs state that a USTB partnership must include in the partnership statement information regarding whether the transferor’s effectively connected gain or loss was determined under the material change in circumstances rule described in tax code regulations.
Scope of Withholding Obligation
The general approach in the proposed regs required withholding on the transfer of a partnership interest unless an exception or adjustment to withholding applied. Comments suggested that one proposed reg was overly broad because it could require a transferee to withhold in a number of circumstances where Sec. 1446(f)(1)’s statutory language doesn’t require withholding.
In response to the comments, the final regs provide that any person required to withhold under Sec. 1446(f) isn’t liable for failure to withhold — or for any interest, penalties or additions to tax
— if that person establishes to the IRS’s satisfaction that the transferor had no gain subject to tax
on the transfer.
Claims for Treaty Benefits
Under the proposed regs, a transferor may claim an exception or adjustment to withholding when it qualifies for treaty benefits with respect to a transfer of a partnership interest. The proposed rules require that the certification to claim treaty benefits include an applicable withholding certificate that contains the “information necessary to support the claim.”
Comments requested that the IRS clarify what “information necessary to support the claim” for treaty benefits under Sec. 1446(f) was required on:
- Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals),” or
- Form W-8BEN-E, “Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities).”
To address the comments, the IRS will revise the instructions to Forms W-8BEN and W-8BEN- E to describe the information needed to make a treaty claim for purposes of Sec. 1446(f). Also, the final regs allow a transferor to use the applicable withholding certificate as the certification for making a claim for benefits under an income tax treaty.
Modified Amount Realized for Transfers
One proposed reg provided that, when a foreign partnership transfers an interest in a partnership (thereafter referred to as a “transferor partnership”), the transferee may rely on a transferor partnership certification that provides a modified amount realized.
To make the certification, the transferor partnership must provide to the transferee a Form W- 8IMY, “Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting,” allocating the gain to each partner. It must also provide a certification of non-foreign status for each partner that’s treated as a U.S. person. If the transferee may rely on the certification (in other words, the transferee has no reason to believe the certification is false), the modified amount realized is treated as the amount realized on the transfer.
The final regs modify the proposed rules to allow for a reduction of the amount realized when a foreign partnership transferor has a direct or indirect partner that isn’t subject to tax on gain from a transfer pursuant to an applicable U.S. income tax treaty.
The applicability dates of the final regs vary depending on the specific regulation in question. We’ve covered just a few notable revisions here; consult us for more information and any questions you might have. Interested in receiving these blogs directly to your inbox? Signup for our newsletter and international tax blogs here!