US Partnership Interest Disposition by Foreign Partners

The IRS issued final regulations under Sections 864(c)(8) and 1446(f), which retain the basis structure and approach of the respective proposed regulations issued in May 2019.  Here are the key provisions contained in the final regulations that U.S. partnerships with foreign partners, directly and indirectly, should be aware of.

Final regulations under Section 864(c)(8) provide that all or portion of the gain or loss derived by a foreign person from the sale or exchange of a partnership interest is treated as gain or loss effectively connected with the conduct of a US trade or business (ECI). The amount of effectively connected gain or loss is the amount of effectively connected gain or loss that the foreign person would have been allocated had the partnership sold all its assets at fair market value as of the date of the sale or exchange of the partnership interest.  The provision is relevant to foreign person with a direct interest in a US partnership as well as tiered partnerships.

The IRS also finalized regulations under Section 1446(f), which requires withholding on the transfer of a partnership interest subject to the Section 864(c)(8).  The final regulations require the transferee to deduct and withhold a tax equal to 10% of the amount realized on the disposition if a portion of the gain would be treated as effectively connected with the conduct of a US trade of business under Section 864(c)(8).

Generally, the provisions contained in the two final regulations are applicable for partnership taxable years beginning after December 31, 2017.

A partnership that is required to pay Section 1446 tax but fails to do so, or pays less than the amount required, is liable under Section 1461 for the payment of the tax required to be withhold and may be subject to severe penalties.