Section 871(m) generally treats “dividend equivalent” payments on securities lending transactions, repos and “specified notional principal contracts” as dividends from U.S. sources, which potentially are subject to U.S. withholding tax. Under the statute, until March 18, 2012, a notional principal contract (NPC) is treated as a specified NPC in four specific situations, and after that date, any NPC is treated as a “specified NPC” subject to section 871(m) of the Internal Revenue Code, unless the IRS determines that it is of a type which does not have the potential for tax avoidance.
On January 19, 2012, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) issued temporary and proposed regulations regarding the types of NPCs that are affected by section 871(m). The temporary regulations delay the March 18, 2012, effective date of this rule to January 1, 2013, and the proposed regulations provide rules for determining what types of NPCs will be specified NPCs after that date. Significantly, the proposed regulations...
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