Post by Sapphire Capital on Jul 24, 2008 22:35:36 GMT 4
Partnership regulations revised
The Treasury has issued final regulations under section 1446 that provide guidance on how a partnership may reduce its section 1446 withholding requirement by taking into account certain types of deductions and losses passed through to a foreign partner, and that provide rules on how a foreign partner may certify its allocable share of deductions and losses.
Section 1446 generally requires a partnership with taxable income that is (1) effectively connected with the conduct of a US trade or business (ECTI) and (2) allocable to a foreign partner under section 704 to withhold tax at the highest marginal rate applicable to corporations or individuals, as appropriate. The withholding requirements apply to both US partnerships and foreign partnerships.
In response to taxpayers' comments, the final regulations have somewhat liberalised certain provisions in the previously issued temporary regulations regarding the circumstances in which a foreign partner will be eligible to certify deductions and losses to a partnership for reduced withholding. However, stricter rules regarding defective certificates now apply. Additionally, new certification rules for tiered partnerships are provided. The final regulations allow deductions for state and local taxes to reduce the partnership's withholding obligation and modify the rules governing how NOLs should be taken into account for this purpose.
General certification rules
In general, a foreign partner seeking to reduce its partnership's withholding obligation may certify to the partnership for the partnership taxable year certain deductions and losses properly allocated and apportioned to gross income that is effectively connected with the conduct of the partner's trade or business within the US. The deductions and losses must be reported on a qualifying US income tax return for a partner's taxable year that ends before the withholding instalment due date or the close of the partnership taxable year for which the partner certifies the deductions and losses, and the partner must reasonably expect the items to be available and claimed on a qualifying US income tax return for the partner's taxable year ending with or after the close of the partnership taxable year. The preamble to the final regulations clarifies that no anticipated deduction or loss with respect to current operations, in other words, no current year deduction or loss, may be considered.
The eligibility waiting period is reduced
Under the temporary regulations, a foreign partner was required to file a US income tax return for four years before it would be eligible to certify deductions and losses to its partnership for purposes of reducing the partnership's section 1446 withholding obligation. The final regulations have reduced this period to three years. The final regulations clarify, however, that the foreign partner must actually report items of income or gain effectively connected with the conduct of a US trade or business or losses properly allocated and apportioned to these activities in order for the US tax returns to count toward the three-year filing requirement.
Certification requirements for tiered partnerships
In general, a lower-tier partnership may withhold section 1446 tax based on the partners in an upper-tier partnership, provided that the upper-tier partnership supplies sufficient information concerning its partners to the lower-tier partnership.
The final regulations introduce new rules to ensure that deductions and losses certified to an upper-tier partnership are not taken into account by both the upper-tier partnership and a lower-tier partnership or by more than one lower-tier partnership. To this end, an upper-tier partnership that submits a certificate to a lower-tier partnership is not permitted to submit that certificate to another lower-tier partnership. Furthermore, an upper-tier partnership that relies on a certificate submitted to it by a foreign partner may not submit that certificate to any lower-tier partnership.
Finally, so that the IRS can associate the ECTI and certificate with the ultimate partner in an upper-tier partnership, the upper-tier partnership must provide information concerning its partners to a lower-tier partnership, which then submits that information to the IRS. The information includes the name, taxpayer identification number, and allocation of effectively connected items at each partnership tier.
Treatment of NOLs
The final regulations continue to provide that a partnership may consider a partner's NOLs with respect to only 90% of the partner's allocable share of ECTI. The final regulations now tie this limitation to the applicability of the 90% AMT limitation on the use of NOL carryovers. The limitation is applied on a cumulative basis for each instalment period.
State and local taxes may reduce the withholding requirement
The final regulations permit a partnership to reduce the ECTI of a foreign partner by 90% of any state and local income taxes withheld and remitted by the partnership on behalf of the foreign partner, regardless of whether the foreign partner submits a certificate on Form 8804-C to the partnership.
Certain types of deductions cannot Be certified
In addition to disallowing certification of current year deductions and losses, and in response to taxpayers' suggestions, Treasury declined to allow reductions in withholding for charitable contributions and the section 199 deduction.
source:
Edward Tanenbaum (edward.tanenbaum@alston.com), NewYork and Diana Wessells (diana.wessells@alston.com), Washington, D.C.
The Treasury has issued final regulations under section 1446 that provide guidance on how a partnership may reduce its section 1446 withholding requirement by taking into account certain types of deductions and losses passed through to a foreign partner, and that provide rules on how a foreign partner may certify its allocable share of deductions and losses.
Section 1446 generally requires a partnership with taxable income that is (1) effectively connected with the conduct of a US trade or business (ECTI) and (2) allocable to a foreign partner under section 704 to withhold tax at the highest marginal rate applicable to corporations or individuals, as appropriate. The withholding requirements apply to both US partnerships and foreign partnerships.
In response to taxpayers' comments, the final regulations have somewhat liberalised certain provisions in the previously issued temporary regulations regarding the circumstances in which a foreign partner will be eligible to certify deductions and losses to a partnership for reduced withholding. However, stricter rules regarding defective certificates now apply. Additionally, new certification rules for tiered partnerships are provided. The final regulations allow deductions for state and local taxes to reduce the partnership's withholding obligation and modify the rules governing how NOLs should be taken into account for this purpose.
General certification rules
In general, a foreign partner seeking to reduce its partnership's withholding obligation may certify to the partnership for the partnership taxable year certain deductions and losses properly allocated and apportioned to gross income that is effectively connected with the conduct of the partner's trade or business within the US. The deductions and losses must be reported on a qualifying US income tax return for a partner's taxable year that ends before the withholding instalment due date or the close of the partnership taxable year for which the partner certifies the deductions and losses, and the partner must reasonably expect the items to be available and claimed on a qualifying US income tax return for the partner's taxable year ending with or after the close of the partnership taxable year. The preamble to the final regulations clarifies that no anticipated deduction or loss with respect to current operations, in other words, no current year deduction or loss, may be considered.
The eligibility waiting period is reduced
Under the temporary regulations, a foreign partner was required to file a US income tax return for four years before it would be eligible to certify deductions and losses to its partnership for purposes of reducing the partnership's section 1446 withholding obligation. The final regulations have reduced this period to three years. The final regulations clarify, however, that the foreign partner must actually report items of income or gain effectively connected with the conduct of a US trade or business or losses properly allocated and apportioned to these activities in order for the US tax returns to count toward the three-year filing requirement.
Certification requirements for tiered partnerships
In general, a lower-tier partnership may withhold section 1446 tax based on the partners in an upper-tier partnership, provided that the upper-tier partnership supplies sufficient information concerning its partners to the lower-tier partnership.
The final regulations introduce new rules to ensure that deductions and losses certified to an upper-tier partnership are not taken into account by both the upper-tier partnership and a lower-tier partnership or by more than one lower-tier partnership. To this end, an upper-tier partnership that submits a certificate to a lower-tier partnership is not permitted to submit that certificate to another lower-tier partnership. Furthermore, an upper-tier partnership that relies on a certificate submitted to it by a foreign partner may not submit that certificate to any lower-tier partnership.
Finally, so that the IRS can associate the ECTI and certificate with the ultimate partner in an upper-tier partnership, the upper-tier partnership must provide information concerning its partners to a lower-tier partnership, which then submits that information to the IRS. The information includes the name, taxpayer identification number, and allocation of effectively connected items at each partnership tier.
Treatment of NOLs
The final regulations continue to provide that a partnership may consider a partner's NOLs with respect to only 90% of the partner's allocable share of ECTI. The final regulations now tie this limitation to the applicability of the 90% AMT limitation on the use of NOL carryovers. The limitation is applied on a cumulative basis for each instalment period.
State and local taxes may reduce the withholding requirement
The final regulations permit a partnership to reduce the ECTI of a foreign partner by 90% of any state and local income taxes withheld and remitted by the partnership on behalf of the foreign partner, regardless of whether the foreign partner submits a certificate on Form 8804-C to the partnership.
Certain types of deductions cannot Be certified
In addition to disallowing certification of current year deductions and losses, and in response to taxpayers' suggestions, Treasury declined to allow reductions in withholding for charitable contributions and the section 199 deduction.
source:
Edward Tanenbaum (edward.tanenbaum@alston.com), NewYork and Diana Wessells (diana.wessells@alston.com), Washington, D.C.