New 871(m) Regulations Finalize Dividend Equivalent Payment Withholding Rules for Equity Derivatives
25 Pages Posted: 4 Oct 2015 Last revised: 5 Oct 2015
Date Written: October 2, 2015
On September 17, 2015, the IRS and the Treasury Department issued final, temporary, and proposed regulations under section 871(m) of the Internal Revenue Code that provide the rules for withholding on “dividend equivalent payments” on derivatives that reference U.S. equity securities. In general, the rules narrow the class of derivatives that would have been subject to withholding under the proposed regulations issued in 2013. For example, under the new regulations, a “simple contract” is not subject to withholding unless its delta is 0.80 or more whereas, under the 2013 proposed regulations, withholding would have been imposed if the delta was at least 0.70. However, the new regulations still require withholding on “price return only” derivatives that do not provide for payments that reference dividends.
In addition, the new regulations delay the effective date that would have applied under the 2013 proposed regulations. Under the new regulations, withholding is imposed on equity derivatives issued after 2015 that are still outstanding in 2018, and on all equity derivatives issued after 2016. The 2013 proposed regulations generally would have applied to all payments made on an equity derivative after 2015, regardless of when the derivative was entered into.
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