IRS Notice 2023-8

Section 1446(f) Publicly Traded Partnerships

IRC Section 864(c)(8) provides guidance in determining the amount of gain or loss that is treated as effectively connected with a US trade or business when a non-US person sells an interest in a partnership that is engaged in a trade or business in the United States. Sec. 1446(f) serves as an enforcement mechanism by imposing a 10% withholding tax on the amount realized from the disposition. The withholding obligation falls primarily on the transferee or the buyer. If the transferee fails to withhold, a secondary withholding obligation on the partnership to withhold tax on distributions to the transferee in an amount equal to the amount the transferee failed to withhold (plus interest on that amount

Notice 2023-8

Following the 2020 final regulations, the industry raised concerns that brokers would have significant challenges in determining whether entities organized outside of the United States are classified as publicly traded partnerships (PTP) for US tax purposes and thus subject to withholding. As a result, there had been a push to allow a broker to presume that an entity organized outside of the United States is not a PTP unless it has actual knowledge that states otherwise. A PTP organized outside of the United States is presumed to not have effectively connected income unless it represents otherwise on a qualified notice.

Notice 2023-8 provides that the Treasury Department and the IRS have determined that the burden on brokers to determine whether a foreign entity that trades on a foreign market is a PTP for US tax purposes would likely be disproportionate to the amount of gain subject to section 864(c)(8) on transfers of interests in such entities. The Treasury Department and the IRS intend to issue proposed regulations that would amend the final regulations to provide withholding relief to brokers on the sale of an interest in an entity that is organized outside of the United States and that trades solely on a foreign established securities market or foreign secondary market (foreign-traded entity).

However, the IRS also determined that it would be incorrect to allow a broker that knows that a foreign-traded entity is a PTP for US tax purposes to presume that the PTP does not have effectively connected income. As a result, a broker would still be required to withhold on the sale of an interest in the PTP unless the PTP has indicated on a qualified notice that the ten-percent exception applies.

The Notice also states that the IRS intends to issue proposed regulations that would amend the final regulations to allow brokers to rely on late certifications from a transferor of a PTP interest that claims an exception or reduction to withholding when certain requirements are met. The IRS also intends to issue proposed regulations that would amend the final regulations to provide an exception to withholding under section 1446(f) on short sales of PTP interests.

How S&P Global can help?

• Assessments of potential section 1446(f) impact on business operations. Required upgrades need to be a priority for tax operations functions that handle PTP trades. S&P Global Tax Solutions offer consulting and advisory services, providing a high-level impact assessment of the section 1446(f) regulations for our clients. Considering both an instrument and account holder perspective, it assists the customer in assessing their operating model and drafting communications to its account holders regarding the incoming 1446(f) regulations. In addition, we can provide a one-off screening that provides an indicative view as to whether instruments are likely to be in or out of the scope of the 1446(f) regulations.
  
  
• Updated withholding and due diligence solutions (IPS/MD3) that account for Section 1446(f). If a financial institution already knows they have a PTP disposition or distribution, it can map its internal payment systems to the income codes within our withholding logic, and we will provide the appropriate withholding rate.
  
  
• Systemically screen a withholding agent's transactions for 1446(f) purposes. We compare instrument events from our Corporate Actions group that have been flagged for Section 1446(f) review along with any qualified notices that have been issued, compare these with the customer transactions, and systemically provide a withholding rate output and reporting requirements as needed.

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