Foreign partners in partnerships engaged in business in the United States are subject to income taxes at regular corporate income tax rates when selling their partnership interests, the IRS says.
The Obama administration is asking Congress to codify the position. The IRS views the partners as owning directly a share of each partnership asset. Therefore, when a partner sells his partnership interest, he is treated as selling his share of the assets directly. Since the assets are used in a US trade or business, tax must be paid on the unrealized gain in each asset.
The IRS position is explained in Revenue Ruling 91-32. The agency is in the process of writing the position into its regulations, but the regulations are still at an early stage.
In the meantime, the Obama administration is asking Congress to write the same thing directly into the US tax code and to require anyone buying a partnership interest in a partnership engaged in business in the United States to withhold 10% of the gross purchase price unless the seller certifies that the seller is not a nonresident alien individual or foreign corporation. If the buyer fails to withhold the correct amount, then the partnership would be liable for the under-withholding. The partnership would satisfy the withholding obligation by withholding on future distributions that otherwise would go to the new partner.
The typical partnership agreement in the United States has an entire article that addresses when partners can transfer their interests. Careful draftsmen should make sure the agreement requires a partner who transfers his interest to include a clause in the sales document requiring the buyer of the interest to withhold if the seller cannot produce the required certificate.