All foreign (W-8) documented accounts that hold positions (including shares and options) in scope under the 1446(f) regulations will be affected. Generally, 1446(f) regulations impose withholding on securities classified as partnerships for U.S. tax purposes. Examples include, but are not limited to, Master Limited Partnerships (MLP), Publicly Traded Partnerships (PTP), and Exchange Traded Funds (ETF).
Section 1446(f), which was added to the Internal Revenue Code by section 13501 of the Tax Cuts and Jobs Act, Public Law 115-97 (2017), provides rules for withholding on the transfer of a partnership interest described in section 864(c)(8).
A link to the IRS Rule 1446(f) can be found here.
The 1446(f) regulations' effective date is January 1, 2023.
Any question regarding this rule should be referred to a licenced tax professional.
TABLE OF CONTENTS
- Summary of 1446(f)
- 1446(f) Securities
- IRS Rule 1446(f) FAQ
Summary of 1446(f)
The new 1446(f) introduces a second-level 10% withholding tax on distributions Excess of Cumulative Net Income (ECNI). ECNI is defined as excess cumulative net income earned by a publicly traded partnership since its formation that the partnership has not previously distributed. The partnership will declare this amount, which can be up to the declared distribution amount. Consequently, partnership distributions could be subject to withholding tax twice at different tax rates.
The new 1446(f) also introduces 10% gross proceeds withholding on sales of PTPs by W-8 accounts.
The table below will provide a list of underlying securities classified as partnerships. If any of these securities are held by W-8 accounts on and after January 1, 2023, they will be subject to the new 1446(f) regulations.
The above is NOT an exhaustive list of every publicly traded security in scope for section 1446(f). Market circumstances, such as entity conversions and corporate actions, can change an entity’s tax classification.
IRS Rule 1446(f) FAQ
Who is affected by the 1446(f) regulations?
- Clients that have foreign accounts.
- Clients that have foreign accounts with holdings under scope of this rule.
What can I do to avoid 1446(f) withholding tax altogether?
- Domestic (W-9) customers are not in scope for 1446(f). There will be no withholding tax for U.S. holders that have these securities.
- Foreign W-8 accounts that don’t hold any 1446(f) in scope securities will not be subject to any 1446(f)-related withholding and reporting.
What happens if a foreign customer holds 1446(f) in scope securities after January 1, 2023?
- If the 1446(f) partnership security declares a distribution, that distribution may be subject to the new 10% withholding tax on ECNI.
- If the foreign customer decides to sell their units, they may be subject to a 10% withholding tax on their proceeds.
How can customers reclaim funds due to 1446(f) withholding?
Legitimate withheld funds will be remitted to the IRS, and foreign customers will get a 1042-S slip by the tax reporting season. They will have to review with their tax advisors and file a U.S. tax return to reclaim any potential over withholding.