The U.S. Treasury Department and the IRS have issued Notice 2021-51, which announces the intent to defer the applicability date of certain provisions under the final regulations on Withholding of Tax and Information Reporting with Respect to Interests in Partnerships Engaged in a U.S. Trade or Business (TD 9926). The final regulations, published 30 November 2020, provide guidance related to the withholding of tax and information reporting with respect to certain dispositions of interests in partnerships engaged in a trade or business within the United States. The withholding provisions covered by the notice will be deferred from 1 January 2022 to 1 January 2023.
The purpose and background provided by Notice 2021-51 are as follows:
This notice announces that the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) intend to amend the regulations under sections 1446(a) and 1446(f) to defer the applicability date to January 1, 2023 for certain provisions relating to the following: (i) withholding under section 1446(f) on transfers of interests in publicly traded partnerships ("PTP interests"); (ii) withholding under section 1446(a) on distributions made with respect to PTP interests; and (iii) withholding under section 1446(f)(4) by partnerships on distributions to transferees. Before the issuance of these amendments, taxpayers may rely on the provisions of this notice regarding the modified applicability dates.
Sections 864(c)(8) and 1446(f) were added to the Code by the Tax Cuts and Jobs Act, Pub. L. 115-97 on December 22, 2017. Section 864(c)(8) generally provides that gain or loss derived by a foreign person on the sale or exchange of an interest in a partnership engaged in a U.S. trade or business is treated as effectively connected gain or loss and, therefore, is subject to U.S. tax. Section 1446(f)(1) requires a transferee of an interest in a partnership to withhold 10 percent of the amount realized if any portion of the gain on the disposition would be treated under section 864(c)(8) as effectively connected with the conduct of a trade or business within the United States (unless an exception applies). Section 1446(f)(4) provides that if a transferee fails to withhold on the disposition as required under section 1446(f)(1), the partnership must withhold on distributions to the transferee.
On November 30, 2020, the Treasury Department and the IRS published final regulations (TD 9926) in the Federal Register (85 FR 76910, as corrected at 86 FR 13191) primarily relating to withholding and information reporting under section 1446(f). The final regulations include withholding and reporting requirements under section 1446(f)(1) applicable to brokers effecting transfers of PTP interests on behalf of foreign persons. The final regulations also require a broker that pays an amount realized to a foreign broker to withhold on the amount realized, unless the foreign broker is a qualified intermediary (QI) (or a U.S. branch treated as a U.S. person) that assumes primary withholding responsibility under section 1446(f)(1). The final regulations modify certain rules in §1.1446-4, which previously permitted only a publicly traded partnership or a U.S. person to be the withholding agent, to allow a QI (or a U.S. branch treated as a U.S. person) to assume withholding on distributions with respect to PTP interests under section 1446(a), in part to coordinate with withholding requirements under section 1446(f)(1). Under the final regulations, a QI that assumes withholding on a distribution under section 1446(a) must also assume withholding on the distribution under section 1446(f). The final regulations also provide rules under section 1446(f)(4) for withholding and reporting by partnerships (other than publicly traded partnerships) making distributions to transferees of partnership interests who failed to withhold as required under section 1446(f)(1). The provisions of the final regulations described in this paragraph apply to transfers and distributions that occur on or after January 1, 2022.