Nonresident Partner and the New 1446(f) Rule

Does your partnership have a nonresident partner? If so, they could be liable to the United States for any gain on the sale of their partnership interests after Dec. 31, 2017.

IRS Notice 2018-29 has announced that there will be new regulations put forth from the Tax Cuts and Jobs act, requiring that a purchaser has to withhold 10% of any amount realized from the sale of a partnership interest by a nonresident alien or a foreign corporation if any part of the gain is effectively connected to a U.S. trade or business. This notice is directly related to the new code rule 1446(f) – Special rules for withholding on dispositions of partnership interests.

If there is any possibility that any of your partners’ US residency may be questioned, there is paperwork to be filed that can verify residency for U.S. tax purposes. This will be of particular importance in trying to avoid being subject to the withholding tax.
There are also exemptions available to limit the amount of the withholding tax owed, and the IRS is offering reduced or complete forgiveness of penalties for individuals who file the required forms for 1446(f) before May 31, 2018.

If you are an individual or a corporate partner in a partnership that you feel may be subject to these rules, the best practice would be to reach out to your local tax professional to see what options are available to minimize the liability.