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19 January 20236 minute read

Final regulations for transfers of partnership interests take effect

Effective January 1, 2023, rules requiring residual withholding on transfers of interests in partnerships (domestic or foreign) with foreign partners have come into effect. 

Broad regulations were finalized in October 2020 under Section 1446(f) of the Internal Revenue Code of 1986, as amended (the Code)[1]  and generally impose withholding and reporting requirements on the transfers of partnership interests (including secondary sale of interests in private investment funds) held by foreign persons.  Section 1446(f) also imposes residual withholding and reporting requirements on the partnership itself if the transferee of the interest fails to withhold or obtain proper certification excusing withholding.

This alert summarizes the withholding rules under the Section 1446(f) regulations for privately held partnership interests, presents options to reduce or eliminate the potential withholding and describes our current views of how the secondaries market is addressing these changes.


Section 864(c)(8), enacted as part of the Tax Cuts and Jobs Act in 2017, characterizes a foreign transferor’s gain or loss from the disposition of a partnership interest (including an interest in a private investment fund classified as a partnership for US federal income tax purposes) as income effectively connected with the conduct of a US trade or business (ECI) to the extent that the transferor would have recognized ECI gain or loss on the partnership’s deemed sale of its assets at fair market value. 

The withholding obligation under Section 1446(f) serves as an enforcement mechanism for gains that are ECI pursuant to Section 864(c)(8) and requires the transferee of a partnership to withhold 10 percent of the amount realized on the disposition of a relevant partnership interest.  The withholding obligation falls primarily on the transferee of the interest (which could include the buyer in a secondary funds transaction); however, the partnership has a secondary obligation to withhold the Section 1446(f) tax if the transferee fails to withhold on a transfer on or after January 1, 2023.  This secondary withholding is imposed on distributions made with respect to a transferred partnership interest.

Implications and exceptions

The withholding obligation under Section 1446(f) is broad and encompasses almost all transfers of partnership interests, regardless of whether the partnership is organized within or outside of the United States. However, the final regulations provide several exemptions to withholding, including:

  1. The transferor certifies that it is a US person (eg, on IRS Form W9)

  2. The transferor certifies that (1) it was a partner in the partnership for the immediately prior tax year and the entirety of the preceding two tax years and (2) in each of those years, the transferor's distributive share of gross ECI from the partnership was less than $1 million and less than 10 percent of the transferor's total distributive share of gross income from the partnership

  3. The partnership certifies that it is was not engaged in a trade or business within the United States at any time during the tax year of the partnership through the date of transfer or

  4. The partnership certifies that, in a deemed sale of the partnership's assets at fair market value, either (i) the partnership would have no gain that would have been ECI or, if the partnership would have ECI, the amount of the partnership's net gain that would have been ECI would be less than 10 percent of the total net gain on the transfer; or (ii) the transferee would not have a distributive share of gain that would be ECI, or the transferee’s distributive share of net gain that is ECI would be less than 10 percent of the buyer’s distributive share of the total net gain from the partnership.

Effective for transfers on or after January 1, 2023, the transferee is required to certify to the partnership, no later than 10 days after the transfer, the extent to which it has satisfied its Section 1446(f) obligation.

The certification must include either (1) a copy of IRS Form 8288-A that the transferee files with respect to the transfer, or (2) state the amount realized and the amount withheld on the transfer. The certification must also include any certifications that the transferee relied on to apply an exception to withholding or to determine the amount to withhold. 

Partnerships will in turn be able to rely on the transferee’s certification to determine whether they have a residual withholding obligation on the transfer. 

Practical implications for the secondaries marketplace

The effect of these regulations will have an impact on a number of industries but will perhaps have the biggest impact on the secondaries market for interests in private investment funds.  Prior to January 1, 2023, parties to secondary transactions often relied on tax diligence, rather than certificates prescribed by the final regulations, to avoid Section 1446(f) withholding. This may no longer be possible due to the partnership having residual liability for the withholding and only being able to document the correct withholding through correct and complete certificates from the transferee.

Because a foreign seller’s certificate of less than 10 percent ECI will require that the seller have three complete taxable years of schedule K-1s from the partnership, buyers and sellers may need to rely on certificates from the partnership to document that withholding is not required if, for example, a fund had not been in existence for three complete taxable years, or the transfer involves a recently formed alternative investment vehicle.  Historically, the general partners of investment funds have been reluctant to provide these certificates but have recently started to become more accommodating as a result of the residual withholding obligation.

The Section 1446(f) withholding rules may be particularly problematic if a partnership has any liabilities.  Because the withholding obligation is 10 percent of the amount realized on the transfer, and amount realized includes not only the purchase price, but also a transferor’s allocable share of the partnership’s liabilities, transferees (and partnerships in the case of any residual withholding obligation) may be unable to calculate the amount realized with respect to a transaction without a permissible certificate of the seller’s allocable share of the partnership’s liabilities with respect of the transferred interest.  Without such a certificate, the transferee (or, alternatively the partnership) may be required to withhold 100 percent of the purchase price. 

DLA Piper and members of its leading secondaries practice have been closely monitoring the impact of these newly applicable regulations on investment funds and parties to a secondary transfers of investment funds and is working closely with a number of clients to ensure compliance with the law. For more information on these regulations and assistance with compliance, please contact one of the authors of this alert.

[1] Section references hereon in are to the Code, unless otherwise specified.