Prop. Regs. Apply ‘Delta’ Approach For Dividend-Equivalent Payments To Foreign Persons

Section 871(m) was enacted in 2010 to curb the perceived abuse of foreign persons using derivatives — primarily notional principal contracts (NPCs) or swaps — to replicate the ownership of an underlying U.S. equity without such person being subject to U.S. withholding tax on the underlying dividend. Under Section 871(m), a "dividend equivalent payment" is treated as a dividend from U.S. sources and therefore (unless exempt under an applicable income tax treaty) subject to a 30% U.S. withholding tax.

Treasury and the IRS issued Proposed Regulations in 2012 that applied a seven-factor approach to determine whether the use of an NPC by a foreign person was a tax avoidance transaction that would trigger the application of Section 871(m).1 Recently, however, Treasury and the IRS withdrew the 2012 Proposed Regulations and issued new Proposed Regulations (REG-120282-10, 12/4/13) under Section 871(m) that apply a more objective standard.

Originally Published in Journal Of Taxation - January 22, 2014.

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Topics:  Dividends, Foreign Nationals, Income Taxes, Swap Dealers, Swaps, Tax Evasion

Published In: Finance & Banking Updates, International Trade Updates, Securities Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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