Final regulations - Foreign partner's U.S. tax liability on transfer of partnership interest

Given the overall development of the secondaries market and the increasing volume and size of secondary funds, the U.S. tax and withholding regime that applies to a foreign partner transferring an interest in a partnership that is engaged in a U.S. trade or business, enacted as part of 2017 U.S. tax reform, has become an important consideration in structuring and negotiating secondary transactions, even those transactions that do not involve U.S. investments.

Recently, the U.S. Internal Revenue Service (IRS) issued final regulations under IRC Section 864(c)(8) that address the U.S. tax liability imposed on the transferring partner. At a future date, final regulations under IRC Section 1446(f) are expected to be issued addressing the buyer/transferee's obligation to deduct and withhold tax arising from the transfer and making effective a secondary withholding tax obligation imposed on the partnership that is currently suspended.

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