Ten per cent of the price, whether or not you made a gain

A withholding charge collected at the point of sale. The IRS explains that a transferee must withhold ten per cent of the amount realised where any part of the gain would count as effectively connected with a US trade or business.

So it is a collection mechanism rather than the tax itself. The final liability comes later, on a return.

Because the price and the profit are different numbers. An interest bought years ago for a large sum and sold for slightly more produces a small gain, while the deduction tracks the whole consideration.

The arithmetic can invert completely. Where the sale produces a loss, ten per cent of the proceeds still goes to the IRS and waits for a return to release it.

So think of it as a deposit against a liability nobody has calculated yet. That framing makes the cash flow consequences obvious early.

So raise it in the term sheet. A price agreed with no reference to the deduction gets renegotiated later, usually badly.

The connection between the partnership and American business. The charge applies where any portion of the gain on the disposal would count as effectively connected with the conduct of a trade or business in the United States.

So the test looks through to what the partnership does. A partnership trading in America brings its foreign partners inside the rule, whatever the partners themselves do.

Our guide to effectively connected income covers that underlying concept, which the IRS also summarises and which decides far more than this single charge.

So ask the partnership directly. It knows what it does in America, and you will need that answer in writing regardless.

Yes, and this catches partners who never thought they had sold anything at all. The IRS states that a transfer can occur where a partnership distribution results in gain, which puts an ordinary cash payment inside the machinery.

So a large cash distribution exceeding basis can engage the rule. Nobody signed a sale agreement, yet the machinery applies in the same way.

The buyer, which is an unusual place for an obligation like this to sit. The transferee must withhold, so the person handing over the money is the one the rules hold responsible for getting it right.

That changes the negotiation entirely. A buyer facing personal exposure will insist on documentation, on escrow, or on both, well before completion.

In our practice the deduction is rarely the dispute. The dispute is about who proves what, and when.

So sellers should prepare to help rather than resist. The buyer's comfort is what releases your money at completion.

Because the exposure is theirs while the information is yours. A buyer cannot judge whether an exception applies without facts that only the seller and the partnership hold.

So expect requests that feel intrusive for an ordinary disposal. They are proportionate to a liability the buyer has no other way to quantify.

Selling a US partnership interest therefore runs on disclosure as much as on price. The sellers who prepare early are the ones who complete on time.

The partnership steps in, and the consequence follows the buyer rather than the seller. Where a transferee fails to withhold, the partnership must deduct the missing amount from distributions to that transferee.

Interest comes with it. The partnership takes what the buyer failed to withhold plus interest, so delay makes the position worse rather than quieter.

So a buyer who skips the step acquires a problem that follows their investment. That is why experienced buyers never skip it.

It arrived with the 2017 legislation, and it applies to transfers of partnership interests occurring on or after 1 January 2018. So the rule is well established rather than novel, whatever its reputation among people meeting it for the first time.

Final regulations followed in November 2020, and they generally apply to transfers occurring on or after 29 January 2021.

So anybody still working from the earlier interim guidance is relying on a superseded position. Check which framework a precedent document was written under.

Yes, the final regulations provide for them, and they are the practical route to avoiding the deduction. The rules require any transferee to withhold ten per cent of the amount realised unless an exception applies.

The exceptions turn on documentation rather than on fairness. A seller who can evidence the right facts in the right form before completion avoids the deduction; one who cannot does not.

So this is a pre-completion task. Nothing about it works retrospectively.

So start the question at heads of terms. Documentation arriving on completion day has already arrived too late to matter.

They run on a separate track, and the broker does the work. For transfers of interests in publicly traded partnerships, the broker effecting the transfer on behalf of a foreign partner performs the withholding, as the W-8ECI instructions set out.

So an investor holding units through a platform may meet this without any negotiation at all. The deduction simply appears on the contract note.

Not in the way people hope, because the charge does not key off the percentage held. A small stake in a partnership trading in America can engage it just as a controlling one does.

The regulations do contain exceptions, and some smaller or simpler transfers may fall within them. That is a documentation question rather than a size question.

A different provision taxes the income rather than the exit, and foreign partners meet it annually. A partnership with income effectively connected to a US trade or business must withhold on the share allocable to its foreign partners.

The rates are high. The IRS gives 37 per cent for non-corporate foreign partners and 21 per cent for corporate ones.

So the two charges stack across the life of an investment. One takes a slice of income each year, and the other takes a slice of proceeds at the end.

Note that this one falls on the partnership rather than on a buyer. Different person, different trigger, same investment.

Not to this income, which is a small mercy among the complications. The IRS confirms that chapter four withholding does not apply to effectively connected income allocated to foreign partners.

So one layer of the system stands aside here. The partnership withholding regime does the work instead.

It allocates the taxing right, and the answer depends entirely on what the partnership does. Article 13 makes gains on most kinds of property taxable only in the country where the seller lives.

But the article treats business property differently. Gains on property forming part of the business property of a permanent establishment in the other country may be taxed there.

So the treaty answer turns on whether the partnership gives you a permanent establishment. We do not resolve that here, because it depends entirely on what the partnership does.

This is the point people miss, and it costs them cash rather than tax. The deduction operates mechanically on the statutory test, not on the eventual treaty conclusion.

So a seller who ultimately owes nothing can still see ten per cent held back. The treaty position gets resolved on the return, months afterwards.

Through a US return for the year of the disposal. The deduction is credited against whatever the real liability turns out to be, and the excess is repayable.

That requires a US taxpayer number and a filing. Neither is difficult, and both take longer than people allow for.

So build the timetable into the deal rather than discovering it afterwards.

Expect months rather than weeks. The refund follows the ordinary processing cycle for a return, not your deal timetable.

Taxes it as a disposal by a UK resident, measured under British rules. The computation is its own exercise, using sterling and the UK basis rather than the American numbers.

Relief for any American tax then comes through the credit mechanism, capped at what the treaty permitted America to charge.

So run the two computations separately. They use different costs, different currencies and different dates, and they will not agree.

Take an illustrative case. A UK resident sells a ten per cent interest in an American trading partnership for 900,000 dollars, having paid 850,000 for it some years earlier.

The gain is 50,000 dollars. The deduction, though, runs at ten per cent of the 900,000, so 90,000 dollars stays behind.

That is nearly twice the gain. The return reconciles it later, but the cash sits with the IRS until it does.

Notice what drove that. The size of the historic cost, rather than the size of the profit, set the deduction.

The commonest is budgeting against the gain rather than the proceeds. The second is leaving the documentation until completion, when the exceptions need it beforehand.

After those comes the distribution nobody treated as a transfer. A cash payment that produces a gain engages the rule just as a sale does.

A fourth is assuming a treaty argument prevents the deduction. It does not; it only changes the final answer.

First we establish whether the partnership's activity brings the disposal inside the rule at all, because that decides everything that follows. Then we look at whether an exception fits and what evidences it.

We also handle the return that releases the money. Start with our treaty relief service, or reach us through our contact page.