US Investors (Backup Withholding)
The Internal Revenue code and regulations are not clear as to whether or not partnerships are required to withhold tax on behalf of any US investors who are subject to backup withholding, so we spoke with the IRS regarding the matter. We were told that we should NOT be withholding unless an investor provides us with a letter from the IRS stating that the investor is subject to backup withholding or the IRS notifies us that we need to withhold. Simply marking on the W-9 that the investor in subject to backup withholding does not mean that we need to withhold. We must have the letter. The IRS rep stated that if we were to withhold without that letter, then we would be violating IRC 3402(p)(3) which basically says that you cannot voluntarily withhold. It has to be mandated by the IRS. We are also not required to ask for the letter. It needs to be volunteered by the investor or sent by the IRS. We will not be doing any backup withholding for US investors unless we receive a letter.
Under tax current law, capital gains are not taxable to foreign investors and therefore we do not withhold. However, there are provisions of FATCA (Foreign Account Tax Compliance Act) and Regulation § 1.1473-1 which state that capital gains will become a withholdable payment. It looks like that is set to be enforced starting in 2019.