Sale of US Partnership Interests by Foreign Partners Now Requires Withholding

The Internal Revenue Service (IRS) continues to press for more withholding of taxes on income earned, even if not received, by foreign taxpayers as a way to collect US taxes. Common instances happen when US real estate is sold by foreign persons (FIRPTA rules), when US source income is earned by foreign persons of US partnerships or, most recently, on the sale of US partnerships by foreign persons.

Before the Tax Cuts and Jobs Act of 2017, the sale by foreign persons of US partnership interests was not required for withholding. The statute changed as a result of the IRS losing a court case (Grecian case) concerning the taxation of partnership interests where the courts considered this similar to the situation where a foreign person sells an interest in a US corporation – where there is no US taxation.

Resulting Regulation Changes
In 2020, the IRS published final regulations primarily related to withholding and information reporting under Internal Revenue Code Sections 1446(a) and 1446(f), which included:

  • Withholding and reporting requirements applicable to brokers making transfers of publicly traded partnerships (PTP) interests on behalf of foreign persons. Brokers that pay an amount realized to a foreign broker are required to withhold on the amount realized unless the foreign broker assumes primary withholding responsibility as a qualified intermediary (QI) or a US branch treated as a US person.
  • Modification to certain rules that previously permitted only a PTP or US person to be the withholding agent to allow a QI or a US branch (treated as a US person) to assume withholding on distributions with respect to PTP interests. Now, a QI that assumes withholding on a distribution under Sec. 1446(a) must also assume withholding on the distribution under Sec. 1446(f).
  • Rules for withholding and reporting by partnerships other than PTPs making distributions to transferees of partnership interests who failed to withhold as required. This applies to most US partnerships where a foreign person has an interest, such as a joint venture between a US company and a foreign company.

Deferred Applicability Dates
The provisions of the final regulations described above originally applied to transfers and distributions that occur on or after Jan. 1, 2022. However, in Notice 2021-51, the IRS recently announced its intention to defer the original applicability date of certain foreign partnership withholding regulations to transfers and distributions occurring on or after Jan. 1, 2023.

More specifically, the regulations in question relate to withholding:

  • On transfers of interests in PTPs
  • On distributions made with respect to PTP interests
  • By partnerships on distributions to transferees

Taxpayer concerns about timely compliance and proper implementation of the new requirements were driving factors in the deferment decision. The modified applicability date for these provisions will align with withholding and reporting dates of applicable PTP interests. Furthermore, the IRS intends to amend the applicability date of other related regulations so the provisions of the final foreign partnership withholding regulations will also apply after Jan. 1, 2023.

Reliance Now

Before the issuance of these amendments, taxpayers may rely on the provisions of Notice 2021-51 regarding the modified applicability dates.

It’s important to note, this deferral does not apply to the liability for US tax from the sale of a US partnership by a foreign person, but only to the withholding and reporting requirements. Because of the change in the statute, the liability must still be paid by the foreign person for any sales after Dec. 31, 2017. Proper filing and payment of US returns and tax is still required by foreign corporations, individuals, trusts and estates.

If you have a question about how this impacts your particular situation, contact Moore Doeren Mayhew’s tax advisors to help answer your questions and ensure you are meeting US compliance requirements.



Linda Pelczarski


Kenneth Bransom


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