The IRS recently finalized new regulations about withholding tax on transfers of partnership interests held by foreign persons (Final Regulations). The Final Regulations establish mechanisms and clarify several issues affecting partners – as well as underlying partnerships – when partnership interests are transferred. The Final Regulations are particularly important given the rising popularity of LP‑led secondary transactions as a way of generating liquidity, which means the tax withholdings regulations and exemptions will have far-reaching ramifications in the PE industry. The treatment of tax withholdings of foreign partners in the Final Regulations was addressed in a Financial Executives Alliance webinar moderated by Paolo Parziale, managing director and CFO at Abbott Capital Management, and that featured Troutman Pepper attorneys Steven D. Bortnick and Morgan Klinzing. This first article in a two-part series describes the evolution of the tax withholding requirements over the years, as well as notice to partnerships, partnerships’ duties to withhold and the consequences of failing to withhold. The second article
will detail different certificates transferees can obtain to be exempt from tax withholding requirements, as well as strategies to reduce the amount that must be withheld. For additional insights from Troutman Pepper, see “Sponsor‑Appointed Directors on Portfolio Company Boards: Conflicted Transactions, MNPI and Other Risk Areas (Part One of Three)
” (Aug. 4, 2020); and “Navigating PPP, TALF and Fundraising During the Coronavirus Crisis
” (Jul. 28, 2020).