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U.S. Tax Reform Legislation to Impact Secondaries Transactions: Transfers of Partnership Interests by Non-U.S. Partners May Be Subject to New 10% U.S. Withholding Tax

12月 18, 2017

The Tax Cuts and Jobs Act, which is expected to be passed by Congress and signed into law by President Trump later this week, includes a provision that would (i) codify as Section 864(c)(8) of the U.S. Internal Revenue Code the IRS’s longstanding revenue ruling position (recently rejected by the U.S. Tax Court) that a non-U.S. person’s gain from the sale of an interest in an entity classified as a partnership for U.S. tax purposes is subject to U.S. federal income tax to the extent that gain is attributable to built-in gains in partnership assets effectively connected with the partnership’s U.S. trade or business (a “USTB”), and (ii) enforce this tax liability by requiring the buyer of the partnership interest to withhold 10% of the purchase price if any portion of the seller’s gain (if any) is subject to tax pursuant to this new Section 864(c)(8).  This withholding tax, which would be in addition to the current FIRPTA withholding regime, does not exist under current law.  If the buyer of a partnership interest fails to withhold as required by this provision, the partnership would be obligated to withhold the amount that should have been withheld, plus interest, from subsequent distributions to the buyer.

Venture capital and private equity partnerships often operate so as to avoid engaging in a USTB.  Sales of interests in such partnerships should generally not trigger a tax liability for non‑U.S. selling partners and thus not trigger a withholding requirement for buyers under these new rules.  However, it is currently not clear what evidence or certifications could be provided by a non-U.S. seller of a partnership interest to persuade a buyer it need not withhold, given a failure to withhold could expose the buyer to liability for the underlying tax, interest, and penalties.  As a result, there may be scenarios where a buyer, to protect itself, insists on withholding even though the partnership does not engage in a USTB.  There will also be scenarios where the amount required to be withheld substantially exceeds the non-U.S. seller’s underlying tax liability.  In both cases, the non-U.S. seller will need to seek a refund of the excess withholding from the IRS.

Once enacted, again likely later this week, these new rules governing non-U.S. persons’ transfers of partnership interests are to be effective for all transfers of partnership interests on or after 27 November 2017, but the withholding requirement will be effective only for transfers of partnership interests taking place after 31 December 2017.

O’Melveny & Myers LLP can assist private fund clients with analyzing and complying with the new requirements imposed under this legislation.  Please contact the attorneys listed on this Client Alert or your O’Melveny & Myers LLP counsel for questions regarding the information discussed herein.


This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Luc Moritz, an O'Melveny partner licensed to practice law in California, Robert Blashek, an O'Melveny partner licensed to practice law in California and New York, Alexander Anderson, an O'Melveny partner licensed to practice law in New York, John Daghlian, an O'Melveny partner licensed to practice law in Supreme Court of England and Wales, Jan Birtwell, an O'Melveny partner licensed to practice law in Supreme Court of England and Wales, Anita Choi, an O'Melveny counsel licensed to practice law in California, and Billy Abbott, an O'Melveny counsel licensed to practice law in California and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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