IRS Proposes New Rules For Withholding On Interest Transfers In Certain Partnerships

The landmark U.S. tax reform legislation that was enacted at the end of 2017 contained a new federal income tax on gain realized by a foreign seller on the transfer of an interest in a partnership that is engaged in a U.S. trade or business. This measure reversed a court decision that had exempted such gains from federal income tax. In order to enforce that new tax, the legislation also included a new withholding provision under section 1446(f) of the Code, which requires a purchaser of such an interest to withhold tax from the sale proceeds at a rate of 10%. On May 7, 2019, the IRS released proposed regulations with guidance on how to apply the section 1446(f) withholding tax. The proposed regulations are potentially relevant to any foreign investor in a partnership (including a limited liability company classified as a partnership for U.S. federal tax purposes) that carries on a trade or business in the United States or otherwise realizes income effectively connected