Newly issued temporary and proposed regulations indicate when U.S. withholding tax will be required in the case of “dividend-equivalent payments” made to non-U.S. persons under swap contracts on U.S. equities.
Under the HIRE Act, dividend-equivalent payments (that is, payments that are contingent upon or determined by reference to dividends paid on a U.S. equity) made after September 14, 2010, and before March 19, 2012, are subject to U.S. withholding tax only if the swap involves any of the following (and is therefore a “specified swap”):
In connection with entering into the swap, the long party (defined as the party entitled to receive any dividend-equivalent payment under the swap) transfers the underlying security to the short party.
Upon termination of the swap, the short party transfers the underlying security to the long party.
The underlying security is not readily tradable on an established securities market.
The short party posts the underlying security as collateral with the long party.
Please see full advisory below for more information.
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