Sale of Partnership Interest by Foreign Partners and Withholding Requirements: IRC Sections 864(c)(8) and 1446(f)

For the unwary and unprepared, the tax treatment of LLCs and partnerships is fraught with confusion and problems. Ownership interests in these entities are comparable to corporate shares, but there are many important distinctions. Different rules determine tax basis, holding periods, and the character of gain or loss.

Evaluating the tax consequences of a sale or disposition of an LLC or partnership interest often requires considering whether the transferring interest is a profits interest or a capital interest, whether the interest is subject to vesting, and the character and holding period of the assets held by the partnership. To avoid unfavorable tax consequences, tax counsel must know how to evaluate the tax treatment of LLC and partnership interest transfers.

In addition, under Section 1446(f), any transferee is responsible for paying a 10 percent withholding tax on the amount realized from the sale, exchange, or other disposition of their interest if any portion of the gain would be treated as ECI to the trade or business within the U.S. under Section 864(c)(8) unless an exemption applies.

Listen as our panel examines the complex tax rules for transferring LLC and partnership interests and best practices for structuring transactions to obtain the desired tax outcomes.