A&M Tax Advisor Weekly
Key guidance for foreign partners holding interests in partnerships that are engaged in a U.S. trade or business (USTB) was released on May 7, 2019, in the form of proposed regulations under Internal Revenue Code Section 1446(f). Section 1446(f) imposes a withholding obligation on the purchaser of an interest in a partnership that is engaged in a USTB. Many components of these proposed rules appear to fall on the “taxpayer-friendly” side by comparison to analogous rules and procedures prescribed under the Foreign Investment in Real Property Tax Act (FIRPTA), which imposes a similar withholding regime on a foreign person’s disposition of a U.S. real property interest.
More specifically, the IRS and Treasury clarified the exemptions for certain partners and certain transactions and confirmed that a reduced (or zero) withholding rate may be applied without obtaining written approval from the IRS (as is required in many FIRTPA transactions). Additionally, the updated “de minimis” exceptions may provide a broader exemption for foreign partners that have received allocations of $1 million or less in effectively connected taxable income (ECTI) for each of the three immediately preceding taxable years, as well as for disposition of interests in partnerships with less than 10 percent effectively connected assets.
As Alvarez & Marsal Taxand previously reported in “An Ode to Grecian Magnesite,” released on July 17, 2018, the introduction of Section 1446(f) and revisions to Section 864(c) flipped the short-lived Tax Court ruling upside down by confirming that a foreign partner’s gain on the sale of an interest in a partnership engaged in a USTB was not “effectively connected” with that USTB. Section 864(c) was revised to conform to the IRS’ position that gain from a foreign partner’s sale of a partnership interest with a USTB is treated in part as effectively connected gain subject to U.S. tax.