United States

IRS delays updated dividend equivalent withholding requirements


Responding to criticism from industry groups and others, the IRS issued Notice 2016-76, delaying the implementation of certain portions of the updated requirement to withhold on payments of dividend equivalents to non-U.S. persons under section 871(m).

As originally promulgated, the regulations provided that any derivative instrument with respect to an equity security, with a delta of 0.8 or higher with respect to that instrument, is potentially subject to withholding beginning Jan. 1, 2017 (similar rules apply to more complex instruments, where the delta standard would not be reasonable to apply). Due to the difficulty in determining delta, the IRS has provided that only instruments with a delta of one (such as a total return swap that exactly tracks the price of the underlying instrument) will be subject to withholding beginning Jan. 1, 2017.

All other instruments covered by the final regulations will be subject to withholding starting on Jan. 1, 2018. In recognition of the complexity and difficulties inherent in the new rules, the IRS has also announced that it will take ‘good faith’ efforts to comply with the requirements into account while reviewing compliance for 2017 (for delta-one instruments) and 2018 (for all other instruments).

In addition to the main phase-in provisions, the notice also provides relief in the following areas:

  • Simplified determinations of whether separate instruments must be combined for dividend equivalent withholding purposes for 2017
  • For 2017, dividend equivalent withholding may be remitted quarterly
  • Various provisions relating to IRS-approved qualified derivative dealers have been simplified for 2017
  • Certain existing exchange-treated notes are exempt from withholding until Jan. 1, 2020
  • taxpayers applying for qualified derivatives dealer (QDD) status may provide withholding agents with notice on Form W-8IMY that the taxpayer is applying for QDD status, and the withholding agent may rely on such notice to avoid withholding
  • Certain Exchange Traded Notes are identified as not subject to section 871(m) until Jan. 1, 2020

Although the good faith statement indicates the IRS may take a light touch approach to enforcement in 2017 and 2018, it is important to note that no relief will be given if the IRS does not determine that a taxpayer made a good faith effort to comply with the requirements. Since these rules are quite complex, taxpayers should consult with their tax advisors to determine to what extent the relief in this notice applies to them. Moreover, taxpayers affected by section 871(m) should continue to develop internal policies to come into full compliance with the regulations on a timely basis.


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