In this post, we will explain what you need to know about recent changes affecting how foreigners sell partnership interests, including what taxes are involved and the withholding process. The tax landscape has changed significantly in the past few years. These changes mean there are new rules to comply with. If you are a foreigner considering selling your interest in a U.S. partnership, this post is for you.
Understanding the Changes
It used to be that the sale of a partnership interest by a foreign person was not clearly defined in terms of U.S. taxation. Then along came the Tax Cuts and Jobs Act of 2017, which introduced new provisions that impose both withholding requirements and additional taxation on certain partnership interest sales by foreign persons.
Withholding Tax vs. Substantive Tax
When a foreign person sells a partnership interest, there is now generally a mandatory 10% withholding tax that is due on the gross sales price. There are certain exceptions to this rule, so it is important to get advice on whether an exception might apply to you.
This withholding tax mechanism works much like the FIRPTA withholding rules that apply to foreign persons selling U.S. real property. Essentially the IRS requires a deposit because they anticipate a substantive tax will be due.
That brings us to the substantive tax. This tax applies to any gain on the sale of your partnership interest if the gain is deemed to be effectively connected with a U.S. trade or business. For the substantive tax calculation, the U.S. treats the situation the same way as if the partnership itself had sold all its U.S.-based assets at fair market value on the same date that you sold your partnership interest.
After your tax return is prepared, the final tax due on the sale is calculated, and the withholding is credited against that tax due. Any shortfall will have to be paid, while any overpayment will generate a refund from the IRS.
Who is Responsible for Compliance When Foreigners Sell Partnership Interests?
Ultimately, it is the buyer (generally referred to as the transferee) who is responsible for collecting the withholding tax and making sure it reaches the IRS. The IRS has set up procedures similar to FIRPTA withholding, so the forms and payment deadlines will be familiar if you have dealt with U.S. real estate transactions in the past.
However, under the new laws, the partnership itself has an obligation to withhold if the buyer does not comply.
A Time for Answers
With all of these complexities, you might feel overwhelmed or unsure of how to proceed. That is perfectly normal. The rules regarding foreigners selling partnership interests involve many details that can be difficult to navigate without professional assistance. While income tax treaties may provide relief in certain situations, the applicability of those treaties can be complicated. The bottom line is that every situation is different. Seeking out qualified tax advice is essential.
Let Us Partner with You
Quilca CPA Group knows tax rules can be confusing, especially with the ongoing changes. Our knowledgeable advisors are ready to address all your international tax and financial planning needs. We will work with you to ensure you are on a path to full compliance so you can worry less and focus on achieving the growth you desire.
Navigating tax intricacies should not be a solo mission. Partner with a tax advisor who understands your unique circumstances and can advocate for your best interests.
Please feel free to give us a call at (786) 310-5582 or email us at [email protected] to schedule an initial consultation.
We look forward to hearing from you!
