US tax rules can turn routine secondary transfers into costly surprises for Swiss investors. A headline change is Internal Revenue Code (IRC) Section 1446(f), which reshaped how non-US sellers of partnership interests are taxed—and how buyers must withhold. Do not assume it is irrelevant: GPs frequently require Section 1446(f) certifications for LP transfers, even when a Fund appears to have no clear U.S. nexus.
What is Section 1446(f)
Both the buyer (transferee) and the seller (transferor) have responsibilities under Section 1446(f). When a non US person sells or transfers an interest in a partnership without documenting an exemption, the buyer must withhold 10% of the seller’s total “amount realized.” That amount includes cash paid, the fair market value of any property given, and the seller’s share of partnership liabilities assumed by the buyer. If the liability share cannot be validly documented, the default can be withholding 100% of the cash proceeds.
Why this matters for Swiss investors
Swiss pension funds, banks, family offices, and asset managers are active in secondaries involving partnerships with some US nexus, be it underlying or even just a GP with US exposure generally. Section 1446(f) applies, and compliance is mandatory. The rules ensure the US is paid tax on gains effectively connected with a US trade or business—even when the seller is offshore.
Get the right exemption certificates and forms signed and exchanged at the right time. Missteps or delays can trigger unnecessary withholding and downstream compliance issues.
Key practical considerations
- Timing and documentation. Get the right exemption certificates and forms signed and exchanged at the right time. Missteps or delays can trigger unnecessary withholding and downstream compliance issues.
- Residual withholding obligations. If the buyer fails to withhold, the partnership (via the GP) must withhold from future distributions to the buyer. Since 1 January 2023, GPs have been increasingly strict about full 1446(f) documentation before approving transfers.
- Seller filing obligations. If withholding is applied to the transfer, the seller will generally have a US tax filing obligation to report the transaction and claim any credit or refund.
- Market practice and challenges. The market is still settling. Approaches to validating exemption certificates vary, and GPs commonly insist on full compliance before allowing the closing to proceed.
