On January 23, 2012, the IRS and the Treasury Department published temporary and proposed regulations under Section 871(m) of the Internal Revenue Code. The regulations implement the tax and withholding regime applicable to U.S.-source “dividend equivalent” payments made to non-U.S. persons (including non-U.S. hedge funds, swap dealers, banks and others) pursuant to securities loans, sale-repurchase transactions (repos), certain notional principal contracts (NPCs) and certain other instruments.
In general, the temporary regulations extend the rules currently in force to all dividend equivalent payments made after March 18, 2012, but prior to January 1, 2013. For a discussion of the existing Section 871(m) rules, please see an earlier Ropes & Gray Alert.
The proposed regulations are expected to apply to payments made on or after January 1, 2013. They treat the following payments as dividend equivalent payments:
i. any payment that is contingent upon or determined by reference to the payment of a U.S.-source dividend and is paid pursuant to (a) a securities lending transaction, (b) a repo, or (c) a substantially similar transaction;
ii. any payment that is contingent upon or determined by reference to the payment of a U.S.-source dividend and is paid pursuant to a specified NPC (an SNPC); and
iii. any “substantially similar” payment (including a payment pursuant to certain “equity-linked instruments” (such as a futures or forward contract, an option, or other contractual arrangement) and any dividend equivalent tax gross up payment).
Please see full alert below for more information.
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