On December 22, 2017, the President signed the "Tax Cuts and Jobs Act" (the "Act"). The provisions of the Act are generally effective as of January 1, 2018. The Act is considered the most wide-ranging piece of tax legislation to be passed in over 30 years, and it enacts significant changes to the Internal Revenue Code of 1986, as amended.
One significant change is a new provision which requires purchasers who purchase from non-U.S. sellers interests in partnerships or limited liability companies that are engaged in the conduct of a trade or business in the United States to withhold 10% of the "amount realized" by the seller on the sale or exchange of such interest, subject to certain exceptions. An amount realized generally includes (i) cash paid or to be paid, (ii) the fair market value of other property transferred or to be transferred and (iii) the outstanding amount of any liability assumed by the purchaser. Note that, in the case of a sale or exchange of an interest in a partnership or limited liability company, the purchaser is treated as "assuming" the portion of the entity's liabilities that were allocated to the seller under applicable Treasury Regulations.
In order to avoid the obligation to withhold, the purchaser must obtain a certification from the seller that the seller is not a nonresident alien individual or foreign corporation, and such certification must include the seller's taxpayer identification number. If the purchaser fails to withhold the correct amount, the partnership or limited liability company is required to deduct and withhold from future distributions to the purchaser an amount equal to the amount the purchaser failed to withhold.
This new withholding obligation applies to sales and exchanges of interests in non-publicly traded partnerships and limited liability companies occurring after December 31, 2017. The withholding obligation will not apply to sales and exchanges of interests in publicly traded partnerships until regulations or other guidance has been issued. Therefore, if you are considering the purchase, sale or disposition of an interest in a partnership or limited liability company that is engaged in a trade or business in the United States, or if you are the general partner or manager of such partnership, you should take these changes into consideration in determining the tax consequences of the transaction to you, your potential counterparty, and the partnership or limited liability company.
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