US Tax Reform – Senate Bill would Tax Foreign Partners on the Sale of Partnership Interests
November 16, 2017
As discussed in our client alert of July 14, in the Grecian Magnesite case, the United States Tax Court ruled that, under the facts presented, a foreign partner could sell its interest in a domestic (US) partnership tax-free even though the partnership was engaged in a US trade or business (USTB) and generated income effectively connected with a US trade or business (ECI). This was contrary to a long-standing position taken by the IRS as set forth in Revenue Ruling 91-32. The Court’s ruling has caused many foreign partners to consider the structure and timing of dispositions of their US partnership interests.
On November 9, the Senate released its version of the tax reform bill, which effectively calls for the codification of Revenue Ruling 91-32. It would be effective for partnership dispositions occurring after December 31, 2017. This would mean that the Tax Court’s ruling in Grecian Magnesite could no longer be relied upon to support tax-free treatment after year-end. The Bill also imposes a 10% withholding tax on the transferee (or the partnership, if the transferee fails to withhold)
Foreign partners considering a transaction involving the disposition of a US partnership with a USTB should consider implementing the transaction prior to December 31, 2017. As noted in our July 14 alert, the Tax Court ruling did not exempt dispositions of partnerships holding so-called “hot assets” or US real estate (due to the FIRPTA rules). However, qualified foreign pension funds (QFPFs) are no longer subject to FIRPTA. As such, QFPFs could be particularly motivated to consider dispositions prior to year-end.
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