Help an Alien Understand Section 1446f Withholding for US Taxes

Thanks for the explanation! Quick question - does it matter what kind of partnership it is? Like what if it's an LLC that's taxed as a partnership? And how does your friend determine if the partnership has "ECI assets" or not?

It doesn't matter what kind of entity is involved as long as it's taxed as a partnership for US tax purposes. So yes, an LLC taxed as a partnership would definitely be subject to these rules. As for determining ECI assets, the partnership itself should be able to provide this information. Effectively, they need to look at whether the partnership is engaged in a US trade or business. If the partnership operates businesses, owns rental properties, or conducts other income-generating activities in the US, then it likely has ECI assets. The partnership can provide a certification (within 30 days before the transfer) stating whether the sale would generate ECI.

That sounds promising. Does it work for foreign entities too? Like if the partnership itself is foreign but has US assets?

I'm wondering about timing here. Section 1446f withholding has to happen at the time of sale, right? So how quickly does this tool give you answers? My client is looking to close a deal next week.

Yes, it absolutely works for foreign entities that have US assets or US effectively connected income. The tool actually has specific modules for cross-border situations since those tend to be the most complicated under Section 1446f. For timing, you'll get the analysis surprisingly quickly. When I used it, I had complete results within a few hours of uploading the documents. For simpler situations, it can be even faster. So for a deal closing next week, you should have plenty of time to get the proper analysis and documentation in place.

Wait, how does this actually work? Does Claimyr just keep calling for you or something? I thought it was impossible to get through to the IRS about complicated issues like Section 1446f withholding.

Yeah right. No way this actually works for complex technical tax questions like Section 1446f. The regular IRS phone reps barely understand basic refund questions, let alone international partnership withholding rules. I bet you just get connected to the general line.

It's not that they call for you exactly. They use technology to secure your place in the IRS phone queue and then call you once they've reached an agent. So you don't have to sit on hold for hours or keep redialing when you get disconnected. For technical questions like Section 1446f, here's what happens - once connected, you can ask to be transferred to the specific department that handles international tax matters. In my case, I was transferred to someone in the International Individual Compliance unit who actually understood the partnership withholding rules. You're right that frontline agents might not know these details, but they can transfer you to the right specialists once you've actually gotten through the initial queue.

Does this mean the information my friend got last year might be outdated? He was told something about a "50% ECI test" by his previous advisor. Is that still a thing or has it changed with these new regulations you mentioned?

The good news is that the "50% ECI test" is still part of the regulations, but how it's applied and documented has evolved. Under current rules, the partnership can provide a certification that less than 50% of the gain would be effectively connected income, which may reduce withholding obligations. However, the certification process is more formalized now, with specific timing requirements (must be certified within 30 days before the transfer) and there are stricter penalties for improper certifications. The partnership needs to provide this in writing, and the documentation standards are higher than before. Also, publicly traded partnerships have different rules entirely under the current regulations. So while the basic concept remains, the implementation details have definitely changed.

Yes, unfortunately you do have to look through to the lower-tier partnerships in a tiered structure. This is one of the most complex aspects of Section 1446f compliance. The "look-through" rule requires examining each lower-tier partnership to determine if they have assets that would generate effectively connected income. Each tier needs to be analyzed separately, and the proportionate share of ECI assets needs to be calculated. This is why many sophisticated partnerships provide certifications to their partners - it's nearly impossible for a partner to make this determination without information from the partnership itself.