In Focus – So We're Partners

April 23, 2021
FAQs on New U.S. Withholding Tax Rules on Transfers of Interests in Publicly Traded Partnerships.


In November 2020, the IRS and Treasury published in the Federal Register final regulations (T.D. 9926) under Section 1446(f) (the “Final Regulations”) providing the rules governing withholding on transfers of partnership interests by non U.S. holders. Under Section 1446(f), 10% of the amount realized by a non-U.S. seller must be withheld from the sale (or other disposition) of a partnership interest unless an exception applies. These new rules will have significant impact for buyers and sellers of these investments, particularly regarding publicly traded partnerships (PTPs).

This issue of our In Focus series intends to provide answers to questions frequently raised by Brown Brothers Harriman (BBH) customers about the new withholding tax on transfers of interests in PTPs.

Questions and Answers:

What is Section 1446(f) and why was it introduced?

It is important to note as background that non-U.S. persons are generally subject to U.S. income tax only on certain types of U.S. source income:

1. Fixed or determinable, annual, or periodic income (FDAP): Passive income such as interest, dividends, rents or royalties and taxed at a flat 30 percent rate (unless a tax treaty specifies a lower rate).
2. Effectively connected income (ECI): Income that is determined to be effectively connected with the conduct of a U.S. trade or business and is subject to tax at the same graduated rates as a U.S. person.

The IRS has long argued that gain or loss recognized by a non-U.S. partner on the sale of an interest of a partnership that is itself engaged in a U.S. trade or business should be taxable as ECI in proportion to the partner’s distributive share of any unrealized gain or loss of partnership assets attributable to ECI. However, U.S. courts rejected that position, finding it unsupported by prevailing tax law.

Rather than continue litigation, the U.S. Department of Treasury and the Internal Revenue Service enacted new section 864(c)(8) as part of the December 2017 Tax Cuts and Jobs Act (TCJA). Section 864(c)(8) expressly codifies gain or loss of a non-U.S. transferor from the sale, exchange or other disposition (a “transfer”) of an interest in a partnership that is engaged in a U.S. trade or business as effectively connected (EC) and provides clear rules to determine the partner’s distributive portion liable to tax.

In order to ensure compliance in satisfying this new substantive tax liability, the TCJA also included new Section 1446(f), which imposes a 10 percent withholding tax of the amount realized on such transfer (unless an exception to withholding applies).

When will the Section 1446(f) regulations come into effect for publicly traded partnerships?

Withholding will apply to transfers of PTP interests that occur on or after January 1, 2022.

Tax Cuts and Jobs Act
Introduced Section 1446(f) requirement to withhold 10% on transfer of interest in U.S. trade of business partnership interests by non-U.S. persons.

Notice 2018-08
Suspended withholding obligation on dispositions of PTP interests pending issuance of regulations on how to withhold, deposit, and report tax under section 1446(f).

Notice 2018-29
Provided interim guidance clarifying the treatment for amounts withheld under section 1446(f); however, the guidance only addressed dispositions non-PTP interests.

Proposed regulations for IRC 1446(f) containing rules for withholding on partnerships interests for both PTP and non-PTP interests.

Treasury Decision 9926
Final regulations implementing Section 1446(f).

Withholding on PTP’s will begin for transfers on or after January 1, 2022.  

What types of publicly traded partnerships will be in-scope for withholding under Section 1446(f)?

While the rules will primarily impact U.S. master limited partnerships (USMLPs), technically they apply to any partnership that is engaged in a U.S. trade or business within the United States. That means that a non-U.S. partnership, depending on their activities, can also be subject to U.S. withholding and reporting.

The rules define these partnerships as “specified partnerships” and “U.S. trade or business partnerships”, or USTBs. It will be critical to review security onboarding protocols to ensure USTB’s are correctly identified and classified to ensure proper withholding and reporting.

What types of transactions are in-scope?

Section 1446(f) applies to any “transfer” of a USTB partnership, defined by the regulations as a sale, exchange, or other disposition (e.g., redemption), and includes a distribution from a partnership to a partner.



Section 1446(f) applies to any “transfer” of a USTB partnership

Who is responsible for withholding and how will the tax be calculated?

Brokers acting on behalf of the seller (including the seller’s clearing broker and/or custodian) are generally responsible for withholding section 1446(f) tax.

Any broker that makes a payment to a non-U.S. seller of an interest in a PTP treated as a USTB partnership generally must withhold 10 percent of the gross proceeds (referred to as the “amount realized”) paid to the seller, unless an exception from withholding applies.

When the seller is a non-U.S. partnership, brokers may rely on a certification from the non-U.S. partnership to reduce the amount realized on the transfer to the extent allocable to taxable persons.  The certification is made by providing (i) a Form W-8IMY, (ii) a withholding statement allocating the percentage of the gain from the transfer allocable to each direct or indirect partner that is a U.S. or presumed non-U.S. person, and (iii) a certification of non-U.S. status or certification of treaty benefits from each direct or indirect partner that is not a presumed taxable person.

For a PTP distribution, withholding is required on the portion of the distribution that is an amount in excess of cumulative net income of the partnership, as reported on the partnership’s qualified notice with respect to the distribution.

Flow chart showing the transfers of interests in publicly traded partnerships.

Are there any exemptions to withholding?

Yes; the Final Regulations provide several exceptions to withholding on transfers related to PTPs, such as:



Non-foreign status

A broker may rely on a Form W-9 it obtains (or already possesses) from the transferor.

Less than 10 percent ECI gain by partnership

A broker may rely on a “Qualified Notice” (as defined under the regulations) from the partnership that states that if the PTP sold all assets at fair market value (FMV), that any EC gain would be less than 10 percent of the total net gain (or that there is no EC gain).

In addition, exception from withholding is provided under this provision where the Qualified Notice states that the PTP is not engaged in a trade or business within the United States. For the purposes of this exception, the Qualified Notice must have been issued no more than 92 days before the transfer.

Proceeds subject to backup withholding

A broker is not required to withhold under section 1446(f) if the amount realized from the transfer of a PTP interest is subject to backup withholding under section 3406.

Claim of treaty benefits

A broker may rely on a Form W-8BEN or Form W-8BEN-E with a valid treaty claim supporting that the transferor is not subject to tax on any gain from the transfer.

Foreign Dealer

A broker may rely on a Form W-8ECI, Certificate of Foreign Person’s Claim That Income is Effectively Connected With the Conduct of a Trade or Business in the United States it obtains from the transferor certifying they are a dealer in securities (as defined in section 475(c)(1)) and that any gain from the transfer of the PTP interest is effectively connected with the conduct of a trade or business in the United States without regard to the provisions of section 864(c)(8).

How will amounts withheld under Section 1446(f) be reported?

Non-U.S. residents can expect a reporting experience like the current Form 1042-S regime they receive on U.S. source income subject to withholding.

Specifically, a broker is generally required to report on Form 1042-S a payment of an amount realized from the transfer of a PTP interest. When reporting to a non-U.S. partnership, the Form 1042-S should be issued directly to the partnership (as a recipient for reporting purposes) rather than to the partners.

The Final Regulations also clarify that aggregate reporting should be used with respect to amounts realized by a transferor on transfers of PTP interests, as opposed to reporting on a transfer by transfer basis. Instructions to Form 1042-S will amended to reflect these requirements.

Do non-U.S. partners need to file a U.S. tax return?

Yes; the new regulatory packages, including sections 864(c)(8) and 1446(f) reinforces that the IRS expects all non-U.S. partners to file U.S. income tax returns to report their effectively connected income regardless of whether all tax has been satisfied through withholding.

As a practical matter, it is expected that section 1446(f) withholding will exceed the non-U.S. partner’s final substantive liability for the tax year, so the tax return filing will be the mechanism for obtaining any refund due the investor.

How will the regulations impact financial institutions acting as intermediaries on behalf of their customers that are partners in partnerships?

These regulations create significant disadvantages for investors holding USTB partnership interests through non-qualified intermediary accounts. Specifically, the regulations do not allow a withholding agent to rely on underlying partner information passed up by a nonqualified intermediary (an “NQI”) to determine the amount of withholding under section 1446(f).  As a result, 10% withholding will be required on the full amount realized when paid to an NQI on behalf of their customer.

Consider the example where a USTB partnership interest is transferred in an NQI account that has passed up a Form W-8 from the non-U.S. resident partner that is exempt from section 1446(f) withholding under an applicable treaty. In that instance, the full 10% withholding would still be required as the regulations do not allow the withholding agent to consider the partner’s documentation.

While the IRS acknowledges the resulting overwithholding, they support a remedy only insofar as the NQI provides reporting to their customer for the purpose of seeking a credit for the amount withheld.

Qualified intermediaries (QIs) can expect a very different experience with significantly more flexibility. A QI is permitted to assume (or not assume) primary withholding responsibility under section 1446(f) on a sale of a PTP interest regardless of whether they assume other withholding responsibilities on FDAP income. Additionally, a QI may assume primary withholding responsibility under section 1446(f) for sales of PTP interests but not a distribution, and vice versa.

For QIs that do not assume primary withholding responsibility under section 1446(f), the Final Regulations allow a withholding agent to rely on a QIs allocation of an amount realized based on aggregate information about the account holders of the QI (i.e., withholding rate pools) transferring PTP interests to determine withholding. A broker may also rely on specific payee information provided by a QI with respect to a non-U.S. seller (rather than pooled information).

What should you be doing now for the Section 1446(f) regulations?

We recommend that clients consider the following:

  • Review their holdings to check if they have any clients holding U.S. partnership securities.
  • If so, are they held in segregated or omnibus accounts? If omnibus accounts, consider moving to segregated to ensure correct withholding, reporting and K1 distribution.
  • Are they held through an NQI or QI designated account? If NQI, consider implications of holding through an NQI rather than a QI account.
  • Consider how potential matching of client trades occur. Do you undertake internal transfers before trading? If so, how will you make certain a full record is kept ensuring correct withholding and reporting?
  • Will you restrict holding of these assets going forward? If so, consider how this will be implemented.
  • Have you communicated with your clients to ensure they fully understand the implications of holding U.S. securities under the new regime, including potentially requiring a U.S. TIN and the need to submit a U.S. tax return?

In the interim, please contact your local BBH Global Tax Services representative if you would like to discuss these recommendations further.

What is BBH doing now in light of these new regulations?

BBH has a project on-going to assess the impact to the Firm and we remain committed to sharing our insights and views on Section 1446(f) and related U.S. tax regulations. We expect to publish additional communications on any changes to service levels and product offerings for our customers on their PTP holdings, including changes to account types and documentation requirements. 

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