Withholding, reporting on partnerships with US trade or business

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May 2019

Overview

Treasury and the IRS on May 7 released proposed regulations (the Proposed Regulations) under Section 1446(f). Added to the Internal Revenue Code (Code) by the 2017 tax reform act (the Act), Section 1446(f) requires tax withholding and information reporting with respect to certain dispositions by non-US persons of interests in specified partnerships — i.e., generally, partnerships engaged in the conduct of a US trade or business or partnerships that own, directly or indirectly, interests in such partnerships.  

The Proposed Regulations provide rules for withholding, reporting, and paying tax under Section 1446(f) upon the sale, exchange, or other distribution of an interest in a partnership described in Section 864(c)(8), and add to the proposed regulations under Section 864(c)(8) (Proposed Section 864(c)(8) Regulations) a new section addressing notification and reporting requirements. The Proposed Regulations, when finalized, will adopt many of the rules that were described in Notice 2018-29 (discussed below) with some changes.

The Proposed Regulations provide specific rules implementing withholding by brokers on transfers of publicly traded partnerships (PTPs) subject to Section 1446(f)(1) and make related changes to the reporting rules and procedures for adjusting withholding. The Proposed Regulations also make changes to rules regarding withholding on distributions by PTPs, including rules that apply to qualified notices and nominees.

The takeaway

The Proposed Regulations retain most of the provisions set forth in Notice 2018-29 for non-PTPs, with the exception that the postponement of the withholding responsibility for partnerships where the transferee fails to withhold will end when the regulations are finalized. The Proposed Regulations nevertheless will create significant complexity for non-PTPs, requiring the creation of new processes and controls, more frequent asset valuations, and the need for increased communication with existing and prospective partners. While Section 1446(f) withholding that had been temporarily halted for PTPs will now apply, the primary withholding responsibility will rest with the brokers.  This still will require PTPs to be aware of the regulatory requirements and make the necessary changes to their compliance processes, specifically the qualified notice procedures for distributions.

Contact us

Candace Ewell

Partner, Tax Controversy and Regulatory Services, PwC US

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