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Withholding of Taxes on Payments to Foreign Persons

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December 31, 2018


I. U.S. SYSTEM FOR TAXING FOREIGN PERSONS.

A. The U.S. taxes two types of U.S.-source income of foreign persons.
1. If a foreign person is engaged in a trade or business within the United States, the net amount of income effectively connected with the conduct of that U.S. trade or business is taxed at the regular graduated rates. I.R.C. §§ 871(b) and 882(a).
2. If a foreign person derives non-business ("FDAP") income from sources within the United States, the gross amount of the income is taxed at a flat rate of 30%. I.R.C. §§ 871(a) and 881(a).
B. Except for gains on the sale of U.S. real property interests, capital gains are generally exempt from U.S. taxation.


II. WHAT IS A FOREIGN PERSON?
A. Nonresident Aliens.
Nonresident aliens are individuals who are neither residents nor citizens. Although it is fairly easy to determine citizenship, residency is a more complex analysis as described in section III.
B. Foreign Corporations.
Foreign corporations are corporations that are not incorporated in any of the 50 United States or the District of Columbia.
C. Foreign Partnerships. Foreign partnerships are partnerships created or organized under the laws of a foreign country or a U.S. possession.

III. DEFINITION OF RESIDENT ALIEN.
This determination is crucial because the U.S. taxes resident aliens on their worldwide income, but nonresident aliens only on their U.S.-source income. In addition to satisfying the U.S. definition of a resident alien, a resident of a treaty country must also satisfy any tie-breaker tests under the treaty.

|A. Green Card Test.
1. Under the green card test, an alien is treated as a U.S. resident for a calendar year if, at any time during that calendar year, the alien is a lawful permanent resident of the United States. I.R.C. § 7701(b)(1)(A)(i).
(a) An alien qualifies as a lawful permanent resident of the
United States if the alien has been lawfully accorded, and has not revoked or abandoned, the privilege of residing permanently in the United States as an immigrant. I.R.C. § 7701(b)(6).
(b) Green card holders are treated as U.S. residents for tax purposes under the lawful permanent residence test.
2. This test forces aliens who have obtained a green card, but have not yet moved to the United States on a permanent basis to pay U.S. taxes on their worldwide income.
(a) These individuals are expected to pay taxes on the same basis as U.S. citizens, since they have rights in the United States similar to those of U.S. citizens.
(b) For example, they have the right to exit and reenter the United States at will.

B. Substantial Presence Test.
1. An alien who does not hold a green card is considered a U.S. resident for the calendar year if the alien is physically present in the United States for 183 or more days during that year. I.R.C. § 7701(b)(3)(A).
(a) The rationale for the substantial presence test is that someone spending more than half the year in the United States establishes a stronger tie to the United States than any other country for that year.
(b) A day counts as a U.S. day if the alien is physically present in the United States at any time during the day. I.R.C. § 7701(b)(7)(A).
(i) Presence for part of a day, such as a day of arrival or departure from the United States, counts as a full day.
(ii) Certain types of U.S. presence are disregarded, including commuters from Mexico or Canada, travelers between two foreign points, individuals with medical conditions, and certain exempt individuals such as teachers, trainees, and students.

2. The strange way the United States counts the days extends U.S. residence to aliens whose stay in the United States is prolonged, but is less than 183 days in any given calendar year.
(a) The 183 day standard is applied by counting a day of presence during a current year as a full day, a day of presence during the first preceding year as one-third of a day, and a day of presence during the second preceding year as one-sixth of a day. I.R.C. § 7701(b)(3)(A)(ii).
(b) In all cases, an individual must be present in the United States for at least 31 days during the calendar year to be considered a resident for that year. I.R.C. § 7701(b)(3)(A)(i).
(c) Due to the way we count, an individual who consistently spends just one-third of the year in the United States is treated as a U.S. resident.
(d) This potentially unfair result is mitigated by the closer connection exception provided the alien satisfies the following requirements:
(i) The alien is present in the United States for less than 183 days during the current year;
(ii) The alien's tax home for the current year is in a foreign country; and
(iii) The alien has a "closer connection" to that foreign country than to the United States (looking at all the facts and circumstances).
(e) The "closer connection" exception does not apply if the alien has applied for a green card.

C. Treaty Tie-Breakers.
1. Each country, such as the United States, as well as foreign countries, has their own definition of what constitutes a resident.
2. An individual may qualify as a resident under both U.S. tax principles and the tax principles of a foreign country.
3. Most U.S. tax treaties include tie-breaker provisions to determine which of the two countries an individual is resident.
4. In order, an individual is a resident of the country where:
(a) the individual has available a permanent home;
(b) the individual has his or her center of vital interests (personal and economic relations are closer to the country);
(c) the country in which he or she has a habitual abode;
(d) the country in which he or she is a citizen;
(e) by mutual agreement between the competent authorities of the two countries.

IV. WITHHOLDING ON U.S.-SOURCE INCOME.
A. Introduction.
1. After the withholding occurs, foreign investors generally do not incur further U.S. tax obligations.
2. Withholding is necessary because it is the only way to guarantee tax collection from foreign persons.
B. General Rules.
1. Other than backup withholding, only the income of foreign persons is subject to withholding.
2. To be subject to withholding, the income must generally be of a type that is:
(a) fixed, determinable, annual, or periodic ("FDAP"), and
(b) derived from sources within the United States.
(i) Fixed, determinable, annual, or periodic income includes interest, dividends, rents, royalties, salaries, wages, premiums, annuities, and other forms of compensation. I.R.C. § 1441(b).
(ii) If the income is from a foreign source, the income is generally not subject to U.S. withholding.
3. No deductions are allowed. Treas. Reg. §§ 1.871-7(a)(3) and 1.881-2(a)(3).
4. The payor has a liability if withholding fails to occur.
C. SOURCING RULES.
1. Interest income is sourced by the residence of the debtor.
2. Dividends are sourced by the residence of the paying corporation.
3. Services are sourced by where the services are performed.
4. The place where property or property rights are used determines the source of rent or royalty income.
5. The source of income or gain from the sale or other disposition or use of real property is determined by the property's situs.
6. The general rule for the source of income from the sale of personal property is determined by the residence of the seller. I.R.C. § 865(a).
7. Income from the sale of purchased inventory generally follows the "title passage" rule (i.e., sourced where the title to the inventory transferred to the buyer). I.R.C. § 861(a)(6) and § 862(a)(6); Treas. Reg. § 1.861-7(c).
(a) If title passes abroad, the income is foreign-source.
(b) If title passes in the United States, the income is U.S.- source.
(c) Passing title abroad will rarely result in a foreign country imposing tax.
8. Income from the sale of inventory manufactured (produced) in the U.S. and sold outside the U.S. is treated as derived partly within and partly without the U.S. (I.R.C. § 863(b)) and must be allocated between both countries.
(a) The most commonly used method is the sales and property formula ("50/50 method"). Treas. Reg. § 1.861-3(b)(1).
(b) 50 percent of the gross income from the sale is apportioned between U.S. and foreign sources on the basis of relative average book values of property held or used to produce the income being apportioned. Treas. Reg. § 1.863-3(b)(1).
(c) The remaining 50 percent is apportioned based on title passage.

D. Exemptions and Special Rules.
1. Withholding is not required on any U.S.-source income that is effectively connected with the conduct of a U.S. trade or business. I.R.C. § 1441(c)(1).
(a) However, FDAP is treated as effectively connected income if it passes one of the following tests:
(i) The income is derived from assets used or held for use in the active conduct of a U.S. trade or business OR
(ii) The activities of the U.S. trade or business are a material factor in the realization of the income. I.R.C. § 864(c)(2).
(b) The withholding exemption for effectively connected income generally does not apply to the personal services income of a nonresident alien (the exception to the exemption).
(c) To claim exemption from withholding for effectively connected income, the foreign person must submit an exemption certificate to the payor (Form W-8ECI). Treas. Reg. § 1.1441-4(a)(2).

2. Portfolio interest received by a foreign person is exempt from U.S. withholding tax. I.R.C. §§ 1441(c)(9) and 1442(a).
(a) Portfolio interest is generally any U.S.-source interest paid or accrued on debt obligations.
(b) Interest received by a 10% shareholder does not qualify for the portfolio interest exemption. I.R.C. §§ 871(h)(3)(A) and 881(c)(3)(B).
3. Bank deposit interest is also exempt from withholding. I.R.C. §§ 871(i) and 881(d).
4. Treaties usually reduce the withholding rate on dividends, interest and royalties, and may exempt personal services income.
(a) Treaties usually reduce the withholding tax rates on dividends to 15% or less, but the rate is often lower for controlling companies (those that own 10% or more of the paying corporation's shares) than for noncontrolling shareholders. Although the withholding rate on dividends is 5% for a company owning 10% or more of the corporation distributing the dividend (and 15% for all the shareholders) under the U.S. model treaty, some treaties even reduce the withholding rate on dividends to 0% (e.g., Australia, Belgium, Denmark, Finland, France, Germany, Japan, Mexico, Netherlands, Sweden and the United Kingdom).
(b) Although many tax treaties often reduce the withholding tax rate on interest to 15%, the U.S. model treaty exempts interest from withholding tax.
(c) The typical treaty rate on royalties is 10% or less.
(i) Often the treaty rate depends on whether the payment is for a commercial royalty (a payment for the use of a patent, trade secret, or commercial know-how), which is typically exempt from withholding, or an entertainment oriented royalty (from use of a motion picture, television show or copyright on a book), which is usually at a reduced withholding rate.
(ii) The U.S. model treaty exempts all royalties from withholding.
(d) Treaties often eliminate withholding on personal services income if an employee is present in the United
States for no more than 183 days and the employee's compensation is borne by a foreign business.
5. The rate on a foreign partner's allocable share of a partnership's effectively connected taxable income is the maximum U.S. tax rate applicable to the allocable share of the foreign partner.
6. A foreign corporation or nonresident alien individual who is a passive investor in a U.S. real property interest may elect to have the U.S.-source income derived from the investment taxed as if it were effectively connected income. I.R.C. §§ 871(d)(1) and 882(d)(1).
(a) Because deductions are allowable against effectively connected income, this election offers the opportunity to offset the gross income from investments in U.S. real property with related deductions.
(b) To qualify for the election, the foreign person must derive income during the tax year from real property located within the U.S. and held for the production of income. I.R.C. §§ 871(d)(1) and 882(d)(1).
(c) The election applies for all subsequent taxable years and may be revoked only with the consent of the I.R.S. I.R.C. §§ 871(d)(1) and 882(d)(1).

E. Foreign Athletes and Entertainers May Obtain Reduced Withholding via the Central Withholding Agreement Program. Rev. Proc. 89-47.
1. A foreign athlete or entertainer working in the Unites States will incur a withholding tax at 30% of the gross compensation.
2. After the tax year closes, the foreign athlete or entertainer may file a return on the net income and pay tax at marginal rates, which, due to significant expenses, is usually less than the withholding.
3. The IRS is concerned about the administrative burden of dealing with numerous potential withholding agents that pay compensation to the foreign athlete or entertainer and issuing a jeopardy assessment.
4. The athlete or entertainer and the IRS can negotiate a Central Withholding Agreement ("CWA") to reduce the amount of withholding by a designated agent to an estimate of what would be the ultimate amount of income tax on net income.

F. The Payors Must Complete a Form 1042 Package when making a payment of FDAP.

V. RESPONSIBILITIES OF WITHHOLDING AGENT.
A. Payment of U.S.-source non-business income.
1. Any person having control, receipt, custody, or disposal of a payment of U.S.-source FDAP income to a foreign person is obligated to withhold U.S. tax. IRC §§ 1441(a) and 1442(a).
2. Examples of withholding agents include corporations distributing dividends, debtors paying interest, tenants paying rents and licensees paying royalties.
3. A withholding agent who fails to withhold is liable for any uncollected tax. I.R.C. § 1461.
4. As a result, potential withholding agents must carefully review any payments made to foreign persons to ensure that the appropriate amount of tax is being withheld.
B. Documentation.
A U.S. payor ordinarily may rely on a type of Form W-8 or Form W-9 to determine the country of the payee's residence.
1. Withholding is not required for dividends to a payee that has provided a Form W-9 for U.S. status unless the facts and circumstances indicate that the payee is a foreign person.
2. Most other noncompensatory payments of FDAP eligible for treaty-based withholding relief should generally be reported on Form W-8BEN or Form W-8BEN-E.
3. Nonresident alien recipients of ECI should generally file Form W-8ECI.
4. Intermediaries should generally file Form W-8IMY.
5. Foreign governments, international organizations, foreign central banks and certain other special entities should generally file a Form W-8EXP.
6. Individual nonresident alien employees or independent contractors should generally file a Form 8233 for compensatory payments eligible for treaty-based withholding relief.

VI. PRESUMPTIONS IN THE ABSENCE OF DOCUMENTATION.
A. Generally.
If the payee fails to provide adequate documentation, such as a Form W-9, W-8-BEN or W-8BEN-E, the payor must follow certain presumptions to determine: (a) the classification of the payee (e.g., individual, corporation, partnership, etc.) and (b) whether the payee is a U.S. or foreign person. In addition to the discussion below, see generally Treasury Regulations section 1.1441-1T(b)(3).
B. Classification.
In the absence of adequate documentation, a withholding agent must attempt to classify the payee based on available information. The payee is initially presumed to be an individual, trust or estate. If the available information does not suggest the payee is an individual, trust or estate, the payee is presumed to be a corporation or other "exempt recipient" (i.e., a payee exempt from 1099 reporting and Code section 3406 backup withholding requirements; "exempt recipients" include corporations, trusts, exempt organizations, REITs, certain dealers and brokers, certain governmental entities, etc.). If the withholding agent cannot treat the payee as an exempt recipient, the payee is presumed to be a partnership. If the payee is a foreign partnership, it will not be the beneficial owner of the payments; if the payee is a U.S. partnership, it is a nonexempt recipient.

C. United States versus Foreign.
In the absence of adequate documentation, the regulations generally presume that a payee is a U.S. person. Certain exceptions include:
1. Exempt recipients are presumed to be foreign if:
(a) the withholding agent knows the payee's EIN begins with "98;"
(b) the withholding agent's communications to payee are mailed to an address in a foreign country;
(c) the payee's name indicates that it is an entity that is a "per se" foreign corporation under the check-the-box regulations (other than a name which contains "corporation" or "company"); or
(d) if the payment is made with respect to an "offshore obligation (i.e., an account maintained at a non-U.S. bank or certain other obligations).
2. Payees of taxable scholarship or fellowship income are presumed to be foreign if the withholding agent has a record of the payee holding a U.S. visa other than a green card.
3. Payees of pensions, certain annuities, etc. relating to retirement will be presumed to be foreign unless the withholding agent has the payee's social security number and a U.S. mailing address or an address in a country that has a tax treaty with the United States providing for an exemption from U.S. tax on such amounts.

VII. INTERMEDIARIES.
A. Generally.
An intermediary is a person that acts as a custodian, broker, nominee or otherwise as an agent for another person with respect to a payment it receives. There are two types of intermediaries, qualified and nonqualified.
1. A qualified intermediary ("QI") is an intermediary that has entered into a withholding agreement with the IRS. QIs may include foreign financial institutions, foreign branches of U.S. financial institutions, foreign corporations, trust companies, and other parties acceptable to the IRS.
2. A nonqualified intermediary is any intermediary that is not a U.S. person and is not (or is not acting in its capacity as) a QI.
B. Qualified versus Nonqualified Intermediaries. In contrast to a nonqualified intermediary, a QI may:
1. Provide a withholding certificate (Form W-8IMY) without providing the underlying certificates or documentary evidence (e.g., Forms W-9, W-8BEN from account holders, etc.). Such underlying documentation may, however, need to be provided to the extent the QI does not assume primary 1099 reporting or backup withholding responsibility. Qis within a chain of intermediaries will issue their withholding certificates on the strength of the withholding certificates received from other intermediaries.
2. Assume primary responsibility for:
(a) withholding and reporting with respect to U.S. persons (i.e., 1099 reporting and backup withholding) and/or
(b) withholding with respect to foreign persons (i.e., Code section 1441, etc. withholding). A QI that does not elect to assume any such responsibilities may still benefit from only having to submit a
Form W-8IMY, although it will need to provide additional "withholding rate pool" information to allow the withholding agent to fulfill its withholding obligations.
3. Use external, rather than IRS, auditors to determine whether it has fulfilled its obligations under its withholding agreement with the IRS.

VIII. THE FOREIGN ACCOUNT TAX COMPLIANCE ACT ("FATCA").
A. Introduction.
1. FATCA is intended to combat offshore tax evasion through increased information reporting and tax withholding requirements through a variety of common situations involving offshore payees and accounts beneficially owned by U.S. persons.
2. The threat of potential withholding on U.S.-source payments is used as leverage to obtain information on U.S. persons invested in foreign accounts.
3. The FATCA withholding regime in I.R.C. sections 1471 through 1474 applies before any analysis of withholding under I.R.C. sections 1441 through 1445. (a) If FATCA withholding applies, there isn't any withholding under I.R.C. sections 1441 through 1445. (b) If FATCA withholding does not apply, analyze withholding under I.R.C. sections 1441 through 1445.
4. Applies to withholdable payments made on or after July 1, 2014.
5. The administrative burden may be reduced by either of the following:
(a) Intergovernmental agreements reached between the
U.S. Treasury Department and a foreign country; or
(b) Registration by specified foreign financial institutions.
B. The Foreign Account Tax Compliance Act ("FATCA").
1. Some U.S. persons have invested in foreign entities (deposits in foreign banks, shares of foreign companies, etc.) without reporting or paying tax on their income earned from these foreign entities.
(a) At the same time, these foreign entities often earned FDAP income in the United States that was exempt from withholding via either the Code or a tax treaty.
(b) The IRS was, in essence, whipsawed by U.S. taxpayers who did not report income earned by their foreign entities whose U.S.-source income did not incur tax.
(c) Despite the attempts of the IRS to use the exchange of information articles in tax treaties to try to obtain information about these foreign entities and U.S. persons,1 these requests were often unfruitful.
(d) FATCA combats this problem via threatening the foreign entities (i.e., the foreign bank or the foreign company) with a 30% withholding tax on its U.S.-source withholding payments when the foreign entities do not provide information about U.S. persons on Form 8966, FATCA Report.
(e) FATCA applies to foreign financial institutions2 and non-financial foreign entities.3
(f) Foreign governments, international organizations, central banks, and certain retirement funds are exempt from the FATCA withholding requirements of Chapter 4.4
(g) FATCA does not apply to payments to nonresident aliens.
2. The FATCA regime of Chapter 4 imposes withholding before any analysis of the FDAP regime of Chapter 3.
(a) If there is withholding under the FATCA regime, the analysis ends and there is not any withholding under the FDAP regime.
(b) If withholding does not apply under the FATCA regime, the taxpayer must analyze the potential implications of withholding under the FDAP regime.5
3. The threat of FATCA withholding under Chapter 4 induces the foreign entity to provide information to the IRS for withholdable payments.
(a) Withholdable payments include interest, dividends, rents, royalties and, in contrast to the FDAP regime, any gross proceeds from the sale of property that can produce these types of income.6
(b) Payments for personal services,7 unlike the FDAP rules, and all other forms of ECI to recipients, are not withholdable payments.8
C. FATCA Applies to Foreign Financial Institutions.
1. The U.S. payor must withhold unless the foreign financial institution certifies that it does not have any accounts of
$50,000 or more9 held by U.S. persons.10
2. The information required on the Form 8966 that the foreign financial institution must provide the IRS includes the name, the address, the taxpayer identification number, and the account balance or value.11
3. FATCA defines a foreign financial institution as a foreign entity that accepts deposits in the ordinary course of a banking business, holds financial assets for the accounts of others as a substantial portion of its business, or engages primarily in the business of investing, reinvesting, or trading in certain securities, partnership interests, or commodities.12
4. The definition of a foreign financial institution does not include foreign companies in non-financial groups that conduct holding company, treasury center, or captive financing functions.13
5. Foreign financial institutions are either participating, deemed-compliant, or non-compliant.
(a) Payors of withholdable payments to participating or deemed-compliant foreign financial institutions do not have to withhold under FATCA.
(b) Payors of withholdable payments to non-compliant foreign financial institutions have to withhold under FATCA.
(c) A non-compliant foreign financial institution is one that fails to annually provide information about U.S. account holders to the IRS. More specifically, foreign financial institution must satisfy due diligence procedures to identify U.S. account holders.14
6. A participating15 foreign financial institution may comply with FATCA by providing information pursuant to an
InterGovernmental Agreement (IGA) between the foreign financial institution's country and the United States.
(a) The United States has entered approximately 34 IGAs, primarily with our major trading partners and with
Western and Central European countries, under one of two models.
(b) Under Model 1,16 which is the most popular model (signatory countries include Canada, the United
Kingdom, and Germany), the foreign financial institution reports to its foreign country, which collects the information for provision to the IRS.
(c) Under Model 2,17 which is the less popular model (signatory countries include Switzerland), the foreign financial institution reports directly to the IRS.
7. Some foreign financial institutions are deemed-compliant.
(a) The extensive list of those that are deemed-compliant includes local foreign financial institutions.
(b) Local foreign financial institutions have neither a fixed place of business nor solicit customers outside its home country and have 98% of its account values from depositors in its home country.18
8. Foreign financial institutions must perform 30% "passthru" withholding on U.S.-source withholdable payments to recalcitrant account holders and non-participating foreign financial institutions.19
D. FATCA Applies to Non-Financial Foreign Entities.
1. FATCA similarly threatens imposing a 30% withholding tax under Chapter 4 on withholdable payments to non-financial foreign entities.20
2. Withholding under the FATCA regime does not apply if the non-financial foreign entity provides the IRS information about its substantial U.S. owners (greater than 10% U.S. shareholders), such as their names, taxpayer identification numbers, and ownership percentages.21
3. Alternatively, a non-financial foreign entity may elect to directly report information about its U.S. owners to the IRS instead of providing the information to the payor of the withholdable payment.22
4. Non-Financial Foreign Entities are either excepted or passive.
(a) Payors of withholdable payments to excepted non-finanical foreign entities do not have to withhold under FATCA. Payors of withholdable payments to passive non-financial foreign entities have to withhold under FATCA.
(b) To be excepted, a non-financial foreign entity must be either publicly-traded, an affiliate of a publicly-traded entity, or an active entity.23
(c) A non-financial foreign entity is active if less than
50% of both its gross income and assets are passive.
(d) All other non-financial foreign entities are passive and must provide information about their 10% U.S. owners to the IRS or incur FATCA withholding.

IX. TAXATION OF U.S. REAL PROPERTY INTERESTS.
A. Introduction.
1. The Foreign Investment in Real Property Tax Act ("FIRPTA") equates the tax treatment of real property gain realized by domestic and foreign investors.
2. Before FIRPTA, foreign persons generally were not taxed on gains from the disposition of a U.S. real property interest.
3. FIRPTA provides that gains or losses realized by foreign corporations or nonresident aliens from any sale, exchange, or other disposition of a U.S. real property interest is taxed in the same manner as income effectively connected with the conduct of a U.S. trade or business. I.R.C. § 897(a)(1).
4. Gains from the dispositions of a U.S. real property interest are taxed at the regular graduated rates, whereas losses are deductible from effectively connected income. I.R.C. §§ 871(b) and 882(a).
5. There is a 10% withholding requirement.
B. U.S. Real Property Interests.
1. U.S. real property interests include interests in land, buildings, mines, wells, growing crops, timber, etc. I.R.C. § 897(c)(1)(A)(i).
2. A U.S. real property interest also includes any interest in a domestic corporation that was a U.S. real property holding corporation at any time during the five-year period ending on the date of the disposition of such interest. I.R.C. § 897(c)(1)(A)(ii).
(a) Therefore, foreign persons cannot avoid FIRPTA by incorporating their U.S. real estate investments and then realizing the resulting gains through stock sales.
(b) A domestic corporation is a U.S. real property holding company if the fair market value of its U.S. real property interest equals 50% or more of the fair market value of the sum of the corporation's assets. I.R.C. § 897(c)(2).
 (c) A domestic corporation owns proportionately its share of the assets of any other corporation it controls. I.R.C. §§ 897(c)(4)(B) and (c)(5).
3. Publicly traded corporations are exempt from FIRPTA.
C. Withholding Requirements.
1. Any transferee acquiring a U.S. real property interest must withhold a tax equal to 10% of the amount realized on the disposition. I.R.C. § 1445(a).
(a) A transferee is any person, foreign or domestic, that acquires a U.S. real property interest by purchase or other means.
(b) The amount realized is the sum of the cash paid or to be paid, and includes the fair market value of any other consideration, as well as any liabilities on the property the purchaser assumes.
2. Similar to the withholding taxes, a transferee that fails to withhold is liable for any uncollected taxes. I.R.C. § 1461.
3. The following situations reduce the withholding burden on FIRPTA transactions:
(a) The transferor provides the transferee an affidavit that the transferor is not a foreign person or that a corporation is not a U.S. real property holding company;
(b) The transferee receives a withholding certificate issued by the I.R.S. notifying the transferee that no withholding is required;
(c) A nonrecognition provision applies; or
(d) The property is a personal residence for which the purchase price does not exceed $300,000.

X. Withholding on the Purchase of U.S. Partnership Interests.
A. Prior to the 2017 Tax Cut and Jobs Act
1. Sales of shares of U.S. corporations by foreign persons are not subject to U.S. tax, unless FIRPTA applies.24
2. Sales of interests in U.S. partnerships by foreign persons were subject to tax under Rev. Rul. 91-32.25
3. The Tax Court ruled that Rev. Rul. 91-32 was incorrect and exempted from tax the gain on the sale of U.S. partnerships sold by foreign persons.26
B. The 2017 Tax Cuts and Jobs Act
1. Congress "reinstated" taxability on foreign persons selling
U.S. partnership interests.27
2. A purchaser of a partnership interest from any seller must now withhold 10% of the purchase price unless the seller
provides an affidavit certifying non-foreign status.28

1 Article 26(1) of the U.S. Model Treaty of 2016.
2 Code Sec. 1471.
3 Code Sec. 1472.
4 Code Secs. 1471(f) and 1472(c).
5 Reg. § 1.1474-6(a) and (b).
6 Reg. § 1.1471-1(a). FATCA only began to apply to gross proceeds from the sale of property that can
produce withholdable payments starting January 1, 2017.
7 Reg. § 1.1473-1(a)(4)(ii).
8 Code Sec. 1473(1)(B).
9 Code Sec. 1471(a)(1)(B)(ii).
10 A financial account is any depository account maintained at a foreign financial institution, any custodial
account maintained at a foreign financial institution, and any equity on debt or debt interest in such foreign
financial institution. Code Sec. 1471(d)(2).
11 Code Sec. 1471(c).
12 Code Sec. 1471(d)(5).
13 Reg. § 1.1471-5(e)(5).
14 Code Sec. 1471(b)(1)(B).
15 Reg. § 1.1474-1T(b)(9).
16 Reg. § 1.1471-1(b)(78).
17 Reg. § 1.1471-1(b)(79).
18 Reg. § 1.1471-5(f)(i)(A).
19 Code Sec. 1471(b)(1)(D)(i).
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20 Any foreign entity other than a foreign financial institution. Code Sec. 1472(d).
21 Code Sec. 1472(a) and (b).
22 Reg. § 1.1471-1T(c)(1)(vi).
23 Reg. § 1.1472-1(c).
24 Code Sec. 865(a).
25 1991-1 C.B. 107.
26 Grecian Magnesite Mining Co. v. Commissioner, 149 T.C. No. 3 (2017)
27 Code Sec. 864(c).
28 Code. Sec. 1446(f)


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