The recent tax reform legislation, commonly known as the Tax Cuts and Jobs Act, imposed new withholding obligations on the transfer by a non-U.S. owner of an interest in a partnership engaged in a U.S. trade or business. The transferee is required to withhold 10% of the non-U.S. transferor's amount realized on the transfer. To the extent the transferee fails to do so, the partnership must withhold the required amount from future distributions to the transferee.
In December 2017, the IRS released Notice 2018-08, which suspends the withholding requirements (both as to the transferee and the partnership) with respect to dispositions of publicly traded interests in publicly traded partnerships until further guidance is issued.
On April 2, 2018, the IRS released Notice 2018-29, which provides guidance regarding the application of the withholding rules to dispositions that are not covered by Notice 2018-08. Notice 2018-29 provides that, until relevant regulations, other guidance or forms and instructions have been issued, upon a disposition of a non-publicly traded partnership interest:
- No withholding by the partnership is required, except where the partnership is itself the transferee.
- The transferee is required to withhold unless it receives from the transferor, and has no knowledge of falseness of:
- a certificate of non-foreign status, either in a prescribed form similar to a FIRPTA certificate or a modified IRS Form W-9;
- a certification that the transferor realized no gain on the transfer;
- where the transferee is not the partnership itself, a certification that the transferor was a partner in the partnership for its three preceding tax years for which the required information reports were due or filed, and in each of those years less than 25% of the income allocated by the partnership to the transferor was income effectively connected with the conduct of a U.S. trade or business ("ECI"); or
- a certification, in a form similar to the form prescribed under the FIRPTA rules, that pursuant to a nonrecognition provision of the Internal Revenue Code no gain or loss is recognized on the transfer.
- The transferee is not required to withhold if it receives from the partnership, and has no knowledge of falseness of, a certification that less than 25% of the hypothetical gain upon a sale of all of the partnership's assets for their fair market would be ECI.
- Where the transferee is required to withhold,
- the rules under FIRPTA for reporting and paying over the tax withheld will generally apply, with certain modifications;
- no penalties will be imposed for filings or payments required to be made on or before May 31, 2018, if such filings or payments are made by May 31, 2018;
- it may in some cases, to calculate the amount it must withhold, rely on a certification of the partnership or a non-controlling transferor partner regarding the amount of partnership liabilities includable in the transferor's "amount realized" on the transfer; and
- the amount any transferee other than the partnership or a person related to the transferor is required to withhold generally will not exceed the price it pays (determined without regard to partnership debt).
Pending further guidance, Notice 2018-29 also
- allows a partnership to rely on its books and records, or a certification of the distributee partner, to determine the extent to which a distribution to the partner exceeds the partner's basis in its partnership interest (and is therefore subject to withholding by the partnership as the deemed transferee of a partnership interest);
- provides rules governing the overlap of the new withholding rules and the FIRPTA withholding rules (generally giving priority to the FIRPTA rules, but in some cases requiring withholding of the greater of the amount required under the new withholding rules and the FIRPTA withholding rules); and
- provides a look-through rule for determining the extent to which withholding is required with respect to an interest in a partnership which owns an interest in another partnership (i.e., a tiered partnership arrangement).
Neither Notice 2018-08 nor Notice 2018-29 reduces the obligations of the transferor partner to pay tax on its gain on the transfer.
Both Notice 2018-08 and Notice 2018-29 request comments on the substantive issues relating to the new withholding rules.
Notice 2018-29 applies only to non-publicly traded partnership interests. It has no effect on the interim relief granted to publicly traded partnership interests under Notice 2018-08.
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