On April 2, 2018, the Internal Revenue Service (IRS) issued Notice 2018-29 (Notice), providing important interim partial relief from the withholding tax obligations imposed on the transfer of partnership interests by foreign persons, including:
- Suspension of secondary partnership liability following a failure by the transferee to withhold tax;
- Transferees (and partnerships making distributions) are permitted to rely on previously collected IRS Forms W-9 in lieu of the need to collect non-foreign certification from the transferors/partners;
- De minimis exceptions eliminating withholding requirement if (i) the partnership certifies that the amount of effectively connected gain that would be recognized if the partnership sold all of its assets is less than 25 percent of total gain; or (ii) the transferor certifies that in the prior three years less than 25 percent of the income allocable to it from the partnership was effectively connected income;
- No withholding required with respect to nonrecognition (tax free) transactions;
- No withholding required if transferor certifies that it has no gain on the transfer; and
- In case of distributions, the partnership may rely on its own books and records or on the partner’s certification to determine tax basis, and no withholding is required if the amount distributed does not exceed tax basis.
Taxpayers may rely on the interim guidance in the Notice pending the issuance of regulations. The modification or suspension of withholding provided in the Notice does not affect a foreign transferor’s substantive tax liability under the Internal Revenue Code.1