The IRS issued guidance on certain foreign persons and foreign-owned partnerships that invest in qualified opportunity funds (QOFs). The guidance allows a reduction or elimination of withholding tax on the capital gains from the sale of these investments. Additionally, the guidance provides flexibility for disaster extensions of the working capital safe harbor for federal disasters. The proposed regulations apply to a covered transfer that occurs after the date that these regulations are published as final.
Background on foreign person and qualified opportunity funds. A foreign person includes a nonresident alien and foreign corporation who are partners with indirect and direct ownership in the partnership. Foreign persons are generally subject to U.S. income tax on amounts that are effectively connected with the conduct of a trade or business within the United States.
A taxpayer may elect to defer the taxation of capital gain realized from the sale or exchange of property to an unrelated party by reinvesting the capital gain in a qualified opportunity fund. A qualified opportunity fund is an investment vehicle that is organized as a partnership or a corporation to operate a business in designated low-income areas referred to as opportunity zones. If the taxpayer reinvests any capital gain into a QOF within 180 days after the sale, tax on the gain is not due until December 31, 2026 or, if earlier, the date the taxpayer sells their investment in the fund.
Withholding tax. In general, foreign persons are subject to withholding requirements on payments or allocations of effectively connected income, including the disposition of a United States real property interest. Generally, the transferee must withhold a specified percentage of the amount realized and deposit the tax with the IRS within a certain number of days. Exceptions and reductions to the rate of withholding can apply, including the foreign person obtaining a withholding certificate from the IRS to reduce or eliminate the amount required to be withheld on the transfer.
Reduction or elimination of withholding tax with an eligibility certificate. An eligibility certificate can be used as a basis for reducing or eliminating withholding on a covered transfer. Depending on the withholding type, a security-required person may apply for a withholding certificate from the IRS based on an eligibility certificate or a transferee to rely on an eligibility certificate to qualify for an exception or adjustment to withholding. A security-required person means a person that is either a foreign person other than a partnership or a specified partnership.
Working capital safe harbor expanded for a federally declared disaster. After the major disaster declarations issued in response to the ongoing COVID-19 pandemic, commenters expressed a need for additional regulatory guidance regarding the operation of the 24-month extension for the working capital safe harbor. Additional flexibility has been added in the guidance for qualified opportunity zone businesses to revise or replace the original written designation and written plan, provided that the remaining working capital assets are expended within the original regulatorily required 31-month period, increased by the 24 additional months provided in response to the Federally declared disaster.
To learn more about the withholding requirements and the deferral of the gain on qualified opportunity funds applicable to foreign persons and partnership, you may contact our office.
Venkat Iyer. CPA(USA). CPA(Canada). MBA
Venkat holds a CPA credential both in the USA and Canada, and he is very proficient in tax and compliance requirements in both countries. He is a Seasoned Business Adviser with 18+ years of extensive experience in diversified industries and accounting firms.He is also very prominent in implementing Lean Principles and Strong Financial Foundations for Hotels and Restaurants. He believes the key to any business success is knowing their indicators and their impact. He has been helping businesses with predictive analytics, transforming data from their enterprise's system for delivering meaningful insights.He is also a Business Automation Expert helping streamline the workflows from marketing to management to ensure optimal business performance.