IRS Provides Initial Guidance on New Tax and Withholding Rules for Foreign Partners Disposing of Partnership Interests by Arthur Dichter, JD

Posted on April 19, 2018 by Arthur Dichter

The IRS issued Notice 2018-29 providing guidance relating to the new withholding rules that apply when a foreign person disposes of a partnership interest. An IRS notice does not have the force and effect of actual regulations, but it does provide taxpayers with direction on how the IRS expects to enforce rules and eventually issue regulations in the future.

The recent tax reform law codified a long-held IRS position that gain or loss from the sale, exchange or other disposition of a partnership interest by a nonresident alien or a foreign corporation is taxable to the extent that the foreign person would have been subject to tax had the partnership sold all of its assets at fair market value. This rule applies to dispositions occurring on or after November 27, 2017. The notice does not provide any further guidance on determining the actual gain that is subject to tax.

The Tax Cuts and Jobs Act (TCJA) added an obligation for the acquirer (transferee) of a partnership interest to withhold a 10 percent tax on the amount realized on the transfer unless the transferor furnishes an affidavit or certificate to the transferee stating that the transferor is not subject to withholding. If the transferee fails to withhold the tax, the partnership is required to withhold from distributions to the transferee until the unpaid withholding tax (plus interest) has been satisfied. The recent Notice does not address the mechanics for this withholding. The IRS previously issued guidance suspending the withholding requirement on dispositions of certain publicly traded partnerships.

Notice 2018-29 generally adopts the forms and procedures for withholding on dispositions of U.S. real property interests under the Foreign Investment in Real Property Act (FIRPTA), which requires the purchaser of a U.S. real property interest from a foreign person to withhold and remit 15 percent of the sale proceeds as a withholding tax. The purchaser uses Forms 8288 and 8288-A to report the amount realized and the amount of tax withheld to the IRS, which then processes the withholding tax and returns a stamped copy of Form 8288-A to the transferor. In order to claim a credit for the withholding tax on their income tax return reporting the sale, the transferor must attach a copy of the IRS-stamped copy of Form 8288-A.

The Notice further provides that the transferee of a partnership interest should write “Section 1446(f)(1) withholding” at the top of Forms 8288 and 8288-A and remit payment within 20 days of the transfer of partnership interest. Transferees who fail to withhold properly are liable for the tax, and failure to submit the withholding tax may result in other civil and criminal penalties. The IRS will not assert penalties or interest when transferees file these forms and pay amounts to the IRS on or before May 31, 2018.

Under the Notice, transferees may eliminate their withholding obligation when they receive the following certifications:

The exact information that transferees must receive differs for each certification. However, in general, the transferor or partnership must sign the certification under penalties of perjury. The transferee can rely on the certification unless he or she has knowledge that the information is false.

For purposes of determining the amount realized that is subject to withholding, the disposing partner must consider the amount of liability relief he or she obtained and include the amount realized on the transfer. A partner who owned a less than 50 percent interest in partnership capital, profits, deductions or losses may provide the transferee with a certification that provides the following:

The partnership may also issue a certification relating to the transferor partner’s share of liabilities. The notice does not specify a method for a partner who owns 50 percent or more of the partnership to certify his or her share of partnership liabilities. Therefore, in that situation, presumably the partnership certification would be required.

The total amount withheld cannot exceed the amount the transferor realized (without considering the transferor’s liabilities). If the transferee is unable to determine the amount realized because certification of the transferor’s share of liabilities is not provided, the transferee must withhold the entire amount he or she realized, determined without regard to the transferring partner’s liabilities.

The tax and withholding rules apply to partnership distributions in excess of the foreign partner’s basis in the partnership that would be treated as a capital gain (a partial disposition of the partnership interest).

These rules also apply in cases involving tiered partnerships. If a transferor transfers an interest in an upper-tier partnership that owns an interest in a lower-tier partnership, and the lower-tier partnership would have effectively connected taxable income (ECTI) on the deemed disposition of all of its assets, a portion of the gain recognized by the transferor is characterized as effectively connected gain. Therefore, the lower-tier partnership would be required to provide the upper-tier partnership with information in order for the upper-tier partners to be able to comply with these rules.

The advisors and accountants with Berkowitz Pollack Brant work with domestic and foreign individuals and businesses to comply with international tax laws, maximize tax efficiency and reduce unnecessary compliance costs.

About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant, where he works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at