Tax Reform Reaffirms Tax Liabilities of Foreign Partners in U.S. Businesses by James W. Spencer, CPA
Posted on April 16, 2018 by James Spencer
The overhaul of the U.S. Tax Code that the president signed into law in December 2017 reverses a Tax Court decision from earlier in the same year, which, at that time, represented one of the most significant changes in international taxation in nearly 30 years.
In in July 2017 ruling in the matter of Grecian Magnesite Mining, Industrial & Shipping Co. v. Commissioner of Internal Revenue, the tax court held that the gain a foreign partner yielded from the sale of its interest in a U.S. trade or business was not considered effectively connect income (ECI) and was therefore exempt from U.S. income tax treatment. Prior to this decision, the tax laws followed Revenue Ruling 91-32, which treated such gains as taxable U.S. income.
The passage of the Tax Cuts and Jobs Act, however, revives Revenue Ruling 92-32 and codifies under new section 1446(f) a foreign partner’s gain from the disposition of U.S. partnership assets as taxable U.S. trade or business income, effective for all sales or exchanges occurring on or after Nov. 27, 2017. Moreover, the new law introduces a 10 percent withholding tax to the amount a foreign person realizes from the sale of the partnership interest that occurs after Dec. 31, 2017.
A partner’s actual tax liability could actually be greater than the 10 percent withheld, especially when also considering the partner’s sale of partnership interest as well as a separate, 15 percent withholding tax on sales of U.S. property as required under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
It is critical that foreign partners stay abreast of developments on this matter, especially as the IRS issues technical guidance to help taxpayers apply the new Code Section 1446(f). For example, in January 2018, the IRS issued guidance temporarily suspending the withholding tax from foreign investors dispositions of interests in publicly traded partnerships. In addition, because the IRS has appealed the court’s decision in Grecian Magnesite, it is possible that foreign investors will be required to pay taxes retroactively on gains they may have reaped from sales of interests in a U.S. trade or business that occurred during the fourth month period between July and November 2017.
About the Author: James W. Spencer, CPA, is a director of International Tax Services with Berkowitz Pollack Brant, where he focuses on a wide range of pre-immigration, IC-DISC, transfer pricing and international tax consulting issues for individuals and businesses. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.