To The Moon

The US government recently announced a change in tax policy for foreigners investing in PTP-type companies, which will come into effect on 1 January 2023.

Under the latest provisions of the PTP: for non-US investors holding, selling, trading or transferring PTP related securities, the following US tax costs will be incurred.

● Withholding tax of 10% of the gross amount of the transaction when selling, trading or transferring PTP-related securities.

● Withholding tax of 37% (for individual investors) or 21% (for corporate or institutional investors) of the gross amount of dividends distributed when a dividend distribution is received.

So what exactly is PTP? This article will provide an explanation and answer to your questions.

What is a PTP?

PTP is a publicly traded partnership. This is a type of company and stock in the United States, similar to the domestic classification of company types. It can be divided into sole proprietorship, partnership, joint stock limited company, and so on, while PTP is more inclined to the concept of partnership.

PTP is a type of company/stock structure, which is often used by ETFs and investment companies in addition to partnerships.

What are the implications if I hold PTPs?

Until the Act comes into effect, PTPs can still trade normally as they are not delisted, only the tax rules change. However, from 1 January 2023, the sale of PTP instruments will be subject to a tax of 'gross transaction amount x 10%'. For example, if you buy PTP stock for $1 million and make a 50% profit and sell it for $1.5 million, the tax formula is "$1.5 million x 10% = $150,000". If you buy one million, take a 10% profit and sell at $1.1 million, you will have to pay $110,000 in tax. This instantly transforms from a 10% profit to a 1% loss. It is also worth noting that due to the change in the taxation method and percentage, institutions may take steps to stop clients from trading in the underlying.

How can I tell which instruments fall under the PTP Act?

PTPs are usually found in the energy, raw materials and real estate industries (as the intention of these types of companies is to help save tax in these three industries). Master Limited Partnerships (MLPs) usually have the word LLC or LP after their name and are not taxed in the same way as ordinary companies. Each MLP beneficial certificate is called a "unit" and the beneficiaries are called "unitholders" Etc...

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PTPs are a combination of shares and bonds, and the holder is equivalent to owning a portion of the company. Generally MLPs distribute profits to unitholders on a regular basis, but some also accumulate gains in the net value of the units. The reason why many investment companies use the PTP structure is because of the 'pass-through' tax feature.

Reference list of PTP tickers

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The IRS does not yet provide a complete list of PTPs. This is because the list of PTPs listed on US stock exchanges is constantly changing. Companies may be listed under the PTP type, and existing PTPs may change their registration type and move off the PTP list. Click here for a more comprehensive list

What about those who already have a PTP ticker?

The PTP Act comes into force on 1 January 2023 and there is still over a month left to trade normally. The following are some common trading scenarios.

• If you hold a PTP-type bid and intend to hold it for the long term, you can start by looking at the size of the bid. If it is large, you can wait until the end of December to see if the exclusion is met, or if the ETF company changes its registration type. However, it is pertinent to note that PTP is taxed according to the settlement date. This is the T+2 settlement system, i.e. clearing and settlement are not completed until the second trading day after the transaction takes place. Therefore, if you wish to sell your PTP underlying, it is wise to do so before 27 December to avoid accidentally delaying the settlement date.

• If your holding has a small market capitalisation (< US$1 billion), then you may consider selling early. This is because small caps are more likely to be affected by a wave of investor selling than large caps.

• If you are not currently holding but are used to trading these stocks on a short term basis (e.g. $Natural Gas ETF-United States(UNG)$), you can still trade them for the next two months; just look out for the words LLC, LP etc. When buying stocks from 1 January next year.

Reference.

IRS instructions on PTP products: https://www.irs.gov/individuals/international-taxpayers/publicly-traded-partnerships

Relevant excerpts from the IRS on the total amount withheld from PTP transactions: https://www.irs.gov/individuals/international-taxpayers/partnership-withholding