Final and Temporary Dividend Equivalent Regulations Issued – Some Good, Some Bad, And Some Ugly:

On September 17, 2015, the Internal Revenue Service (“IRS”) released final and temporary regulations under Section 871(m), the Internal Revenue Code provision that treats “dividend equivalents” paid under certain contracts as dividends from sources within the United States and therefore subject to U.S. withholding tax if paid to a non-U.S. person. The regulations finalize regulations proposed in 2013 (the “2013 Proposed Regulations”), with significant changes.

The new regulations generally adopt the “delta” approach introduced in the 2013 Proposed Regulations, which treat payments on notional principal contracts (“NPCs”) and equity-linked instruments (“ELIs”) as dividend equivalents if they have a delta above a threshold.2 However, the delta approach is limited to “simple” NPCs and ELIs and a new framework has been designed for “complex” NPCs and ELIs. We discuss this and other significant changes to the 2013 Proposed Regulations below.