IRS Releases Final and New Proposed Regulations That Define “Dividend Equivalent” for U.S. Withholding Tax Purposes

On December 5, 2013, the Internal Revenue Service (“IRS”) finalized temporary regulations and issued new proposed regulations under Section 871(m), the Internal Revenue Code provision that treats “dividend equivalents” paid under securities lending transactions, sale-repurchase transactions and certain notional principal contracts (“NPCs”) as dividends from sources within the United States and therefore subject to U.S. withholding tax.

The final regulations under Section 871(m) adopt the prior temporary regulations with minimal changes. These regulations conform to the rules applicable to NPCs found in the Code and will continue to apply to payments under such NPCs until January 1, 2016.

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