Final regulations – U.S. withholding tax on transfers of partnership interests

Insights and Analysis

Final regulations – U.S. withholding tax on transfers of partnership interests

30 November 2020

Since 2018, the buyers, sellers, and partnerships engaging in secondary and other transactions involving partnership interest transfers have been navigating complicated U.S. tax and related withholding obligations that apply when a non-U.S. partner transfers an interest in a partnership that is engaged in a U.S. trade or business.

Recently, the U.S. Internal Revenue Service (IRS) issued final regulations under IRC Section 1446(f) that address the buyer/transferee’s obligation to deduct and withhold tax arising from the transfer and that make effective (as of January 1, 2022) a secondary withholding tax obligation imposed on the partnership itself.

These final rules provide some needed flexibility but will continue to require significant attention of the parties in partnership interest transfer transactions to both manage withholding tax risk and minimize overwithholding. These rules are relevant for both U.S. and non-U.S. partners buying from non-U.S. partners and are relevant for any partnerships, with or without a U.S. trade or business, that have (or may have) non-U.S. partners.