IRS provides guidance on transfer of foreign partnership interests under new tax law

The Internal Revenue Service and the Treasury Department have issued guidance about the withholding on the transfer of non-publicly traded partnership interests by foreign persons under the Tax Cuts and Jobs Act, along with guidance on the “transition tax” on the untaxed foreign earnings of overseas subsidiaries of U.S. companies.

The IRS pointed out that the new tax law generally treats a foreign taxpayer’s gain or loss on the sale or exchange of a partnership interest as effectively connected with the conduct of a trade or business in the U.S. to the extent the gain or loss would be treated as effectively connected with the conduct of a trade or business in the U.S. if the partnership sold all of its assets. In that circumstance, the Tax Cuts and Jobs Act also imposes a withholding tax on the disposition of a partnership interest by a foreign taxpayer.

In the new Notice 2018-29, the Treasury and the IRS said they plan to issue regulations, including rules and procedures relating to qualifying for exemptions from withholding or reductions in the amount of withholding under this section of the law. Notice 2018-29 also provides interim guidance to permit the effective and orderly implementation of this section. On top of that, the notice suspends secondary partnership level withholding requirements.

The guidance in the notice doesn’t affect the tax liability imposed as a result of the new tax law. It also doesn’t have an impact on the suspension of the application of withholding in the case of a disposition of certain publicly traded partnership interests as announced in another piece of recent guidance, Notice 2018-08.

The new notice that the IRS and the Treasury issued Monday asks for comments on the rules described in the notice, along with suggestions on what additional guidance should be issued to help taxpayers applying these sections of law. The Treasury Department and the IRS expect to issue additional guidance in the future.

Transition Tax

Separately on Monday, the IRS and the Treasury offered additional guidance in Notice 2018-26 to help business taxpayers compute the “transition tax” on the untaxed foreign earnings of foreign subsidiaries of U.S. companies under the Tax Cuts and Jobs Act. They provided previous guidance on the transition tax earlier this year in Notice 2018-07, Notice 2018-13, and Revenue Procedure 2018-17.

Monday’s notice describes regulations that the Treasury and the IRS plan to issue, including rules intended to prevent the avoidance of section 965, rules and procedures relating to certain special elections under section 965, and guidance on the reporting and payment of the transition tax. The new notice also offers relief to taxpayers from certain estimated tax requirements and penalties arising from the enactment of the transition tax and the change to existing stock attribution rules in the Tax Cuts and Jobs Act.

In addition, the Treasury and the IRS are asking for comments on the rules spelled out in the notice, along with suggestions on what additional guidance should be issued to help taxpayers compute the transition tax. The Treasury and the IRS anticipate they will be issuing additional guidance on the matter in the future.