New Foreign Partnership Withholding Tax under Tax Cuts and Jobs Act

Are you, or is your company looking to purchase interests in a partnership? Are those partnership interests owned by a foreign person, or is the partnership itself part of a foreign corporation? Unsure? If you answered yes to any of the above, when you purchase that partnership interest you may be required under the Tax Cuts and Jobs act to withhold 10% of the amount realized on the sale if any of that amount realized is income effectively connected to the United States. This withholding tax is applicable to any such disposition carried out after the end of 2017.

In the last few decades the IRS has been making more and more of an effort to crack down on appreciated assets held in other countries that should be subject to U.S. taxation. This withholding tax is one of many new regulations created under the Tax Cuts and Jobs Act to help the IRS in this ongoing battle.

One worry that many partnerships are contemplating is that the IRS will take a very general stance when determining who is a foreign individual and thereby subject to the withholding tax. Remember, this is relevant for U.S. partnerships with foreign partners, who want to purchase the partner’s interest in the business back. However, there are steps that can be taken to better prepare for such a scenario, such as filing the necessary paperwork to show the tax residency and compliance of all partners.

The IRS has issued other guidance on how to comply and ways in which a foreign partner may qualify for an exemption, or minimize the withholding tax. This guidance can be found in IRS Notice 2018-29.

Remember, you don’t have to face these issues alone, reach out to your local tax professional and ask about the steps you can take to maintain compliance and to receive the tax deductions/exemptions that you deserve.