New Guidance Continues Status Quo Through 2012, But Proposes More Expansive Application Beginning 2013

The Foreign Account Tax Compliance Act ("FATCA"), which was signed into law on March 18, 2010, as part of the Hiring Incentives to Restore Employment Act (the "HIRE Act"), includes a number of revenue raising provisions affecting cross-border transactions. Among them are provisions that subject certain "dividend equivalent" payments to U.S. withholding tax by treating those payments as dividends from U.S. sources. Although generally effective for dividend equivalent payments made on or after September 14, 2010, the new withholding rules apply to U.S. equity-linked swap agreements in only limited circumstances through March 18, 2012. After such date, the rules would apply to any U.S. equity-linked swap in the absence of further action by the U.S. Department of the Treasury ("Treasury"). On January 19, 2012, Treasury issued tempo-rary and proposed regulations (the "Temporary Regulations" and "Proposed Regulations") addressing the application of these rules to dividend equivalent payments made after March 18, 2012.

Generally speaking, these provisions impact non-U.S. persons that seek to gain exposure to U.S. equities through derivative positions such as U.S. equity-based securities loans, repurchase agreements and, to the extent specified therein, swaps. Withholding tax may be imposed even in transactions between purely non-U.S. persons or, under certain circums-tances, where neither party has hedged its exposure.

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