Final and temporary regulations tweak dividend equivalent tax regime
TAX ALERT |
Final and temporary regulations recently published in the Federal Register by the IRS make various technical changes to the rules for withholding on dividend equivalents paid to non-U.S. persons. Although first publicized by the IRS on Jan. 19, it was expected that a regulation freeze issued by the Trump administration (see prior coverage), would cause these regulations to be withdrawn prior to final publication. Nevertheless, the regulations were published after the freeze, and taxpayers may wish to treat them as fully effective until notified to the contrary. However, doubt remains as to whether these regulations will be withdrawn because they were published in the Federal Register on Jan. 24, 2017, after the issuance of a White House memorandum directing all Federal agencies to withdraw regulations that were sent to the Federal Register but that had not been published as of Jan. 20, 2017.
The new regulations change very little of the core substance of the dividend equivalent regime from prior regulation packages but instead clarify a number of technical issues. These changes include:
- Changes to the definition of a broker for purposes of determining which party is responsible for determining the applicability of dividend equivalent withholding
- Clarifications to the definition of a dividend, particularly with respect to section 305(c) dividends
- A clarification that a contract that provides for an adjustment to the number of shares referenced for corporate actions like splits does not cause a contract to lose its status as a ‘simple contract’
- Revisions to the treatment of certain insurance contracts that are exempt from treatment as dividend equivalents
- Numerous technical changes to the time and method of calculating delta, the primary means by which the applicability of section 871(m) to a contract is determined
- Changes to the timing of a non-U.S. taxpayer’s liability for tax on dividend equivalents, to coordinate with when withholding would be required on payments to that non-U.S. taxpayer
- The addition of an anti-abuse rule to the safe harbor exempting payments on derivatives on ‘qualified indices’
- Numerous technical changes to the Qualified Derivatives Dealer regime, which is a subset of the general rules for Qualified Intermediaries
These regulations are effective as of Jan. 19, 2017, however, they do not override the general delay in the effectiveness of the section 871(m) regime for many derivatives contracts (see prior coverage, IRS delays updated dividend equivalent withholding requirements). Nevertheless, dividend equivalent withholding will be fully in effect as of Jan. 1, 2018, and potential withholding agents should act quickly to update their systems for these new requirements.