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Tax Alert: ECI Ruling Favors Foreign Partners in US Business

Foreign investors in US partnerships had reason to celebrate last month when a major tax court decision rejected the controversial Revenue Ruling 91-32, which stipulates that gains of a non-US partner from the disposition of an interest in a partnership engaged in US trade or business is treated as a sale of partnership assets and subject to US income tax.
 
In Grecian Magnesite Mining, Industrial & Shipping Co. SA v. Commissioner, the court ruled that treating the gains as “ECI” (income effectively connected to the trade or business) directly contradicts the general rule of Section 741 that capital asset dispositions by non-US persons are not subject to US tax.
 
What this means to you
 
The IRS will likely appeal, but if the court’s decision in Grecian is upheld, it will expand the tax planning opportunities available to foreign partners and provide greater after-tax returns on investments in US business. Foreign investors could leverage these tax strategies to bypass the US exit toll and avoid the 30% branch profits tax on US business profits.
 
For more information, please contact Curtis Best, Partner in the Marks Paneth 
 
Compliments of Marks Paneth, an EACCNY member