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Recently, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) issued proposed regulations (REG-105476-18) that implement certain sections of the Internal Revenue Code relating to the withholding of tax and information reporting with respect to certain dispositions of interests in partnerships engaged in the conduct of a trade or business within the United States. The proposed regulations affect: (i) certain foreign persons that recognize gain or loss from the sale or exchange of an interest in a partnership that is engaged in the conduct of a trade or business within the United States, (ii) persons that acquire the aforementioned interests and, (iii) partnerships that, directly or indirectly, have foreign persons as partners.


Section 1446(f)(1) provides that, except as otherwise provided in Section 1446(f), if a portion of the gain (if any) on any disposition of an interest in a partnership would be treated under Section 864(c)(8) as effectively connected with the conduct of a trade or business within the United States, the transferee is required to deduct and withhold a tax equal to 10 percent of the amount realized on the disposition.

On April 2, 2018, Treasury released Notice 2018-29 providing temporary guidance and announcing an intent to issue proposed regulations under Section 1446(f) with respect to the sale, exchange, or disposition of certain interests in non-publicly traded partnerships. Notice 2018-29 and Section 1446(f)(1) generally rely on the principles contained within the Section 1445 withholding regime. Under Section 1445, if a foreign person disposes of a United States real property interest, as defined in Section 897(c), a withholding obligation is imposed on the transferee of the interest.

The proposed regulations provide rules for withholding, reporting, and paying tax under Section 1446(f) upon the sale, exchange, or other disposition of an interest in a partnership described in Section 864(c)(8) and proposed §1.864(c)(8)-1. When finalized the proposed regulations would adopt many of the rules that were described in Notice
2018-29, with certain modifications provided, in part, in response to comments. In addition, the proposed regulations:

  1. Provide reporting rules relating to Section 864(c)(8) and rules implementing withholding under Section 1446(f)(4).
  2. Contain rules clarifying the reporting rules applicable to transfers of partnership interests subject to Section 6050K. Further, the proposed regulations provide rules implementing withholding by brokers on transfers of certain interests in publicly traded partnerships subject to Section 1446(f)(1) and make related changes to the reporting rules and procedures for adjusting withholding under Sections 1461, 1463, and 1464.
  3. Make changes to the rules regarding withholding on distributions by publicly traded partnerships under §1.1446-4, including the rules that apply to qualified notices and nominees.
  4. Provide rules coordinating withholding under Section 1446(f) with other withholding regimes to prevent over-withholding of tax.

The preamble to the proposed regulations details, among other items, rules and additional guidance in the following areas:

  1. Reporting requirements for foreign transferors and partnerships with foreign transferors, including rules to facilitate the transfer of information between a foreign partner and the partnership for purposes of Section 864(c)(8).
  2. Definitions and general rules of applicability, including rules regarding determination dates and coordination with other withholding rules.
  3. Withholding on the transfer of a non-publicly traded partnership interest by a foreign person, including exceptions to withholding, rules to determine the amount to withhold, and rules to report and pay withheld amounts.
  4. The partnership’s requirement to withhold under Section 1446(f)(4) on distributions to the transferee.
  5. Withholding on the transfer of a publicly traded partnership interest by a foreign person, including exceptions to withholding, rules to determine the amount to withhold, report, and pay withheld amounts, procedures to adjust for over-withholding or under-withholding, and rules regarding refunds and credits.
  6. Liability for failure to withhold.
  7. Amendments to existing Section 1446 regulations relating to distributions by publicly traded partnerships.

For dates of proposed applicability, see the proposed regulations.