On December 20, 2018 the IRS and the Treasury issued proposed regulations that address the taxation of foreign partners selling interests in a partnership (U.S. or foreign) that is engaged in a trade or business within the U.S.  Under a new provision enacted as part of the Tax Cuts and Jobs Act, foreign partners selling their partnership interests are taxed on any gain or loss attributable to assets that are used or held for use in the partnership's trade or business within the U.S.  After determining the selling partner's gain or loss under the general rules for partnership sales the proposed regulations provide a three-step process for determining a foreign partner's tax liability upon a taxable or partially-taxable disposition.  The following rules also apply to tiered partnerships. 


  1. Determine the amount of gain or loss the partnership would recognize upon a deemed sale of all of its assets. 
  2. Calculate the portion of such gain or loss that would be treated as effectively connected gain or loss ("EC Gain" or "EC Loss") on such hypothetical asset sale.  That is, generally, a sale of a domestically-sourced asset would result in EC Gain or Loss while a hypothetical sale of a foreign asset would not. 
  3. Determine the seller's distributive share of the EC Gain or Loss in accordance with law or the partnership agreement, as applicable. 


The amount of capital or ordinary gain/loss recognized by the foreign transferor is limited by the amount of EC Gain/EC Loss calculated under Step 2.  For example, if a foreign partner sells its entire interest and recognizes $10 million of capital gain, but only $5 million of which is EC Gain, such foreign partner is taxed on the $5 million of EC Gain.  Notwithstanding the apparent simplicity of this calculation, there may be instances where a foreign partner may recognize an overall loss on the transaction but is still responsible for EC Gain.  This situation can arise when the partnership owns appreciated domestic assets but foreign assets that have declined in value.

Under U.S. withholding laws, if any portion of the gain on the disposition of a partnership interest would be treated as EC Gain the purchaser must withhold a tax equal to 10% of the amount realized (i.e., the gross amount of the consideration).  If the purchaser does not deduct and withhold the requisite amount then the partnership is required to withhold such amount (plus interest) on future distributions to the new partner, thereby shifting the burden to the partnership and complicating bookkeeping matters.  Withholding is not required if the seller provides an affidavit stating, among other things, that the seller is not a foreign person.

The IRS suspended this requirement for transfers of publicly-traded partnerships.  While the proposed regulations do not address withholding requirements for dispositions of interests in publicly-traded partnerships the accompanying preamble states that the Treasury Department and the IRS intend to issue further guidance in the near future. 


Nicole Bouchard

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F: +1.212.938.2858

Harris Cornell

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F: +1.212.938.2935