For most of my career, I have helped clients with domestic business and personal tax issues. The way I saw it, the United States tax code as it relates to these taxpayers was complicated enough – why muddy the waters further by stepping into the world of international taxation?
Well, life isn’t always that easy. Given today’s rapidly moving economy, it seems like more and more of our clients are involved with or starting to become involved with foreign activities. These can range from overseas production, to shipping finished goods abroad, to even having foreign investors. Tax reform recently revamped the entirety of international taxation; however, I want to spend a couple minutes on a small piece of the reform that came up in a recent client situation.
For U.S. partnerships with a foreign partner, newly enacted section 1446(f) mandates that, in the case that a foreign partner sells his interest, the realized funds (i.e., the sales price) are characterized as effectively connected income (ECI) and must be withheld upon at the rate of 10% by the transferee partner. Subject to certain exceptions outlined below, if you purchase an interest in a domestic partnership from a foreign partner, you must withhold 10% of the purchase price, and submit the withholding tax via Form 8288 and 8288-A – similar to a real property sale for foreign individuals (FIRPTA). The transferor receives a credit for the withholding, in essence the prepaid tax, when they file their U.S. income tax return and report the sale.
There are several caveats to this withholding requirement. If the transferor certifies that they will have no gain from the sale of the interest in a manner that meets certain IRS requirements, the withholding may be excused. There are a few other options for people to sidestep the withholding requirement, but you should speak with your Henry+Horne CPA if you plan on purchasing interest in a partnership with a foreign partner, as they are very specific in their application.
It’s important to know that withholding must be submitted within 20 days of the transaction, so don’t delay when it comes to this requirement!
Brock R. Yates, CPA, MT