HIRE Act Imposes New U.S. Withholding Tax Requirement on Payments of Synthetic Dividends under Equity Swap, Security Lending, and Repo Contracts


On March 18, 2010, President Obama signed into law H.R. 2847, the Hiring Incentives to Restore Employment Act (HIRE). HIRE changes current U.S. law to require withholding tax on “dividend equivalent” payments made under equity swap contracts, much like what is currently provided for securities loans and repo agreements by regulation (which now will be codified). For certain “specified” equity swap contracts, as well as security lending and repo agreements, this change is effective for payments made on or after September 14, 2010 (180 days after HIRE’s enactment). For all other swap contracts, this change is effective for payments made on or after March 18, 2012 (2 years after HIRE’s enactment).

HIRE’s withholding tax provisions may materially alter payment amounts and withholding obligations under existing longer-term swap contracts, and may trigger change-in-law provisions under such contracts. Thus, a foreign party to an affected swap might receive a payment reduced by the new withholding tax. Alternatively, a U.S. party to an affected swap might be required to “gross-up” for the withheld tax, depending on the terms of the swap contract. Clients with, or planning, longer-term equity swaps should evaluate these new rules closely.

HIRE also incorporates a number of other provisions designed to crack down on perceived offshore tax avoidance by U.S. persons. Please see Ropes & Gray’s Alert, for more information on these other provisions.

Please see full alert below for more information.

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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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