Written by: Richard Mak, Rita M. Ryan, JD, LLM
The IRS has released an advanced version of Notice 2023-8, which provides additional guidance for brokers who must withhold taxes on interest sales in publicly traded partnerships by non-U.S. persons.
Background
Under the 2017 Tax Cuts and Jobs Act (TCJA), Sections 864(c)(8) and 1446(f) were introduced to the tax code and provided withholding and reporting rules applicable to the transfer of U.S. partnership interests by non-U.S. persons. These rules treated the gain/loss from the transfer as effectively connected with a U.S. trade or business. To ensure the IRS received at least a portion of its share of any tax due on the transfer, a ten percent withholding was implemented on the transfer unless there was an applied exception.
However, questions remained regarding publicly traded partnerships (PTPs) since it was difficult for brokers to determine whether non-U.S. entities would be classified as PTPs for U.S. tax purposes. This resulted in brokers taking an overly conservative approach in applying the above rules and withholding taxes on all interest transfers in such entities by non-U.S. persons.
Notice 2023-8
The IRS intends to ease this conservative approach by issuing regulations that would allow brokers to presume that an entity is not a PTP for U.S. tax purposes unless the broker has actual knowledge otherwise.
The IRS noted, however, that it would be inappropriate for a broker to presume that a PTP does not have effectively connected income and therefore does not intend to include such a presumption in the proposed regulations.
In those cases, brokers would be required to withhold on the sale of a PTP interest unless the PTP has indicated on a qualified notice that an exception applies, or the broker receives a certification from the transferor claiming another exception or reduction to withholding.
Applicability & Insight
The proposed regulations will apply to transfers or distributions made on or after January 1, 2023. Until the proposed regulations are issued, brokers that are required to withhold under Section 1446(a) or 1446(f) may rely on the provisions of the notice.
These proposed updates provide brokers, PTP administrators, and their tax advisors with much needed guidance in an already complicated space. It also allows for relief in papering transactions, proving effectively connected ties and non-resident status, and the associated reporting obligations. That is not to say that these types of transactions should be taken lightly or that appropriate documentation should not be obtained. The amended regulations provide a clearer path in the non-resident withholding arena.
Are you selling a PTP interest or facilitating a transfer by a non-resident partner and have further questions? Please reach out to Wolf’s Tax team.
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