A new hurdle for investor nominees: tax withholding for U.S. Publicly Traded Partnerships
Published
March 2023
Businesses serving non U.S.-based investors are facing a new challenge to identify Publicly Traded Partnerships (PTPs) or risk violating Section 1446(f) of the Internal Revenue Code (IRC), a new regulation adopted by the Internal Revenue Service (IRS) requiring the withholding of tax on the disposition of PTPs.
Compliance with the regulation may be particularly difficult for investor nominees such as brokers, withholding agents and qualified intermediaries because there is no central repository that identifies the type of entities captured under the regulation.
A PTP is a business organization set up as an agreement (partnership) between two or more owners (partners), who can be individuals, other partnerships or corporations.
But the regulation includes a 10% exception from the withholding tax on any transfer (sale, exchange, or disposition) of PTP interests where (1) either the net gain associated with a sale of all of the PTP assets was less than 10% of the company’s business in the U.S. or the net gain was not connected with business in the U.S. or (2) and a no-engagement policy related to trade or business within the U.S., during the taxable period referring the “PTP-QN posting date (exception):"
To identify potential PTPs subject to the withholding requirement of 1446(f), our solution identifies PTPs that:
- are regularly traded on SEC registered securities markets or OTC trading venues.
- engage in activities in U.S. trade or business.
- mainly involved in certain business activities (e.g., energy, natural resources, commodities, logistics, real estate, etc.)
The regulation, which became effective on January 1, 2023, currently affects securities which include exchange-traded products, shares, units and perpetual preferred units.
To make the situation harder to navigate, in accordance with IRC section 1446(f), there is (also) an exemption period before the tax applies if a PTP issues a periodic Qualified Notice (QN). Furthermore, PTP status of some organizations can change following corporate events/actions.
Meanwhile, new listings and de-listings from U.S. securities exchanges adds to the complexity.
The only way to develop a comprehensive list of potential PTPs impacted by the regulation is to assess and monitor a range of corporate filings such as annual reports, prospectuses, tax reports, as well as Schedule K-1, K-2, K-3 tax forms, and ongoing stock exchange releases.
This review can be a time-consuming and error-prone task for investor nominees.
A more efficient solution is to engage ICE’s dedicated team which analyses and monitors corporate filings to ensure that potentially impacted PTPs are identified daily. The solution may be beneficial to banks (including custodians), asset managers, wealth managers, brokers and qualified intermediaries who may meet the definition of “broker” as defined by the IRS for the purposes of IRC Section 1446(f).
ICE’s solution utilises in-depth analysis of an extensive number of sources, with ongoing monitoring of potential PTPs. The service is provided as a file to allow access to a list of potential PTPs that is monitored and updated in a timely manner. In this way, clients can be confident of quickly identifying PTPs and staying informed of any change in an issuer’s status.
What buyers of interests in PTPs need to consider
ICE’s PTP taxation solution
The solution enables access to a continuously maintained list of potential PTP securities (securities are supplied as a “bulk”), delivered via SFTP (data-feed) or daily e-mail (.csv/.xls files). The following is a data-feed example:
| ISIN | Ticker | Security Description | PTP Flag | PTP status expiration date | Security Status | PTP-QN posting date (exception) |
|---|---|---|---|---|---|---|
| ISIN code | Ticker Code | Security Description | Y | Date from which security is no more PTP | Live / Expired | Last Qualified Notice Date |
PTP Flag: indicates the financial instruments potentially in scope of Section 1446(f)
PTP status expiration date: date from which the status of the partnership is no longer a potential PTP
Security Status: “Live” or “Expired” according to corporate actions
PTP-QN posting date (exception): is the date of the most recent “Qualified Notice” produced by the PTP issuer in accordance with the requirements of IRC Section 1446(f). The Qualified Notice may include information relating to the 10-percent exception to withholding set forth in the regulation. The main requirements of the 10-Percent Excption are (1) either the net gain associated with a sale of all of the PTP assets was less than 10% of the company’s business in the U.S. or the net gain was not connected with business in the U.S. or (2) a no-engagement policy related to trade or business within the U.S., during the taxable period referring the “PTP-QN posting date (exception)”
The information provided herein is not to be construed as tax advice. Please consult your tax advisor to determine how this information may apply to your own situation.
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