Final Regulations For Withholding On Foreign Partners' Transfers Of Specified Partnership Interests – Construct, Exceptions, And Reporting

For U.S. tax purposes, gain or loss upon a sale or exchange of property is generally sourced based on the tax home of the seller. For a foreign person investing in a partnership conducting a U.S. trade or business ("specified partnership"), it is important to keep in mind that when at some later date she sells or otherwise disposes of the investment, and no matter where she resides, she will be subject to tax on gain deemed to be effectively connected with a U.S. trade or business.

Code §864(c)(4), added by the Tax Cuts and Jobs Act of 2017 ("T.C.J.A."), and repealing the holding of the Grecian Magnesite case,¹ recharacterizes a sale of a partnership interest as a sale of partnership assets, resulting in gain to the selling foreign partner. Under Code §1446(f), withholding tax of 10% applies to the seller's amount realized.