On April 2, the IRS released Notice 2018-29 (the Notice), announcing the intention to issue regulations under Section 1446(f). Section 1446(f) was enacted by the 2017 tax reform reconciliation act (the Act) and generally establishes a withholding regime for the disposition of partnership interests by a foreign person where the partnership is engaged in a US trade or business, effective for dispositions after December 31, 2017. The Notice provides interim guidance on which taxpayers may rely, pending the release of regulations. In this guidance, the IRS has applied the general reporting and withholding administrative process that applies to dispositions of real property interests by foreign persons.
In Notice 2018-8 (released on December 29, 2017), the IRS postponed application of the withholding requirement to dispositions of publicly traded partnership interests until additional guidance is issued. Rather than also postponing the application of the withholding requirement for interests in non-publicly traded partnerships, as several commenters had requested, Notice 2018-29 suspends backstop withholding by the partnership and provides guidance for the application of Section 1446(f) to transfers of interests in partnerships that are not publicly traded. Purchasers of interests in non-publicly traded partnerships now have foundational guidance on how to comply with these new withholding requirements.
The Notice provides important guidance necessary to allow taxpayers to comply with new Section 1446(f), but many practical challenges remain for transferees. The Notice relies on holders of partnership interests to receive information from the partnership, creating burdens that the partnership may be unwilling to accept. Similarly, if a partnership is widely held with frequent transfers of partnership interests (but is not a publicly traded partnership), providing information on the hypothetical gain that would be realized had all the assets been sold on the date of each transfer may be burdensome and impractical. Further, the Notice does not address the possibility that the amount determined to be ECI under Section 864(c)(8) may be exempted from taxation by a treaty applicable to the foreign transferor. Partnerships should reevaluate their consent provisions to ensure they require adequate notice and sharing of information to comply with these requirements.
Principal, M&A Tax, PwC US