Tax Withholding on Foreign Partners: Overview of Various Exemption Certifications and Tips for Reducing Withholdings (Part Two of Two)

The newly finalized regulations about withholding tax on transfers of partnership interests held by foreign persons (Final Regulations) uphold many of the onerous existing requirements. There are, however, a number of scenarios where, through coordination between LPs and GPs, exemption certificates can be used to mitigate the burdens of the withholding rules. Beyond that, savvy parties can also take steps to reduce the amount of withholding that needs to be performed in connection with each transfer of interests. Those and other ramifications of the Final Regulations for private funds were covered in a recent 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 second article in a two-part series identifies various certificates LPs can obtain to be exempt from tax withholding requirements, as well as techniques to reduce the withholding requirement. The first article charted the evolution of the tax withholding requirements and several important features thereof, including notice to partnerships, partnerships’ duties to withhold and the consequences of failing to withhold. For additional commentary from Bortnick, see “How to Effectively Claim Net Operating Losses Under the CARES Act Without Triggering Potential Negative Ramifications” (Aug. 11, 2020); and “Tax Expert Provides Insights Into Recent U.S. Tax Court Decision on Taxation of Foreign Investments in U.S. Partnerships” (Dec. 7, 2017).

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