The Tax Cuts and Jobs Act (the Act) makes important changes to sales and other dispositions of partnership interests, which require immediate changes to purchase agreements.
The Act provides that gain recognized by a foreign corporation or foreign individual from the sale of an interest in a domestic or foreign partnership is taxable to that foreign person to the extent attributable to assets used in the partnership's U.S. trade or business. The treatment of such gain was unclear under prior law.
Perhaps most importantly, the Act includes a withholding mechanism intended to enforce the tax imposed on foreign persons selling partnership interests. Under new Section 1446(f) of the Internal Revenue Code, the buyer of a partnership interest generally must withhold 10 percent of the amount realized by the seller, which generally includes the purchase price and the selling partner's share of the partnership's debt. The buyer must remit such withholding to the IRS rather than the seller. This withholding applies to purchases of both domestic and foreign partnerships.
Withholding is not required if the seller provides the purchaser with an affidavit signed under penalties of perjury that (i) states that the seller is not a foreign person and (ii) includes the seller's U.S. taxpayer identification number. This requirement is similar to the non-foreign affidavit frequently required to avoid FIRPTA withholding in connection with the sale of a domestic corporation.
When representing purchasers of partnerships, including LLCs taxed as partnerships, you should request a non-foreign affidavit from the seller. Unless additional guidance is issued, we recommend using the same form as the non-foreign affidavit for purchases of domestic corporations (subject to minor modifications). The purchase agreement should include a provision requiring the seller to provide the affidavit. For example, the purchase agreement could require the following closing deliverable: "a certificate executed by each Seller, substantially in the form of [Exhibit ●], duly completed pursuant to Treasury Regulation Section 1.1445-2(b) and Code Section 1446(f)(2) certifying that the Seller is not a foreign person (a FIRPTA Certificate)."
In certain circumstances, withholding can be reduced or eliminated even if the partnership has a foreign partner. However, the Treasury has not yet issued guidance on the implementation of such exceptions and reductions.