On September 21, 2020, the IRS and Treasury Department released final regulations under sections 864(c)(8) and 1446(f) of the tax code. These regulations finalize proposed regulations issued on May 7, 2019 (see our previous discussion here). Section 864(c)(8) taxes foreign partners on certain gain realized from the sale or redemption of an interest in a partnership that is engaged in a U.S. trade or business. The amount of gain subject to U.S. tax is based on the proportion of the foreign partner's gain that would have been subject to U.S. tax if the partnership had first sold all of its assets. The tax is enforced through the withholding provisions of section 1446(f), which generally require the purchaser of the partnership interest to withhold from the gross sale proceeds at a rate of 10%.
The final regulations generally adopt the proposed regulations, but include additional guidance and clarification on some questions that the proposed regulations left open. Whereas the proposed regulations generally treated gain and loss on the hypothetical asset sale described above as U.S.-source, the final regulations include more specific rules for inventory, intangibles, and depreciable personal property. The final regulations also contain specific provisions to address their coordination with (1) income tax treaties, (2) partner-level tax exemptions, and (3) the "FIRPTA tax" on direct or indirect dispositions of U.S. real property interests under section 897.
The final regulations generally apply to transfers occurring on or after December 26, 2018.
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