On March 18 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (the Hire Act). The Hire Act includes provisions that effectively shut down certain dividend washing transactions. As discussed in our prior columns, the US imposes a 30% (or lower treaty rate) tax on US source dividends paid to foreign persons. Historically, it appears that foreign counterparties attempted to avoid US withholding tax on dividends paid on US stock through certain equity swap or securities-lending transactions entered into with investment banks. These transactions were perceived abusive by US authorities because, according to the US Senate report on this issue, the counterparties had no purpose for entering into the transactions other than to avoid US withholding taxes on dividends. The merit of the tax positions of the parties involved in these transactions is under scrutiny by the US Treasury and Internal Revenue Service.
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