New guidance on US withholding on dividend equivalent payments on swaps over US equities

December 2013
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New guidance on US withholding on dividend equivalent payments on swaps over US equities

At a glance

On December 5, 2013, new guidance was released regarding derivatives over US equities that call for dividend equivalent payments that can be subject to up to 30 percent gross US withholding tax. Final regulations extend (to December 31, 2015) the current four factor scheme in section 871(m)(3)(A) for determining whether dividend equivalent payments on swaps are subject to US withholding tax.

The extension of the statutory regime through 2015 is a welcome development; whereas the sweeping scope of the 2013 proposed regulations is sure to stir controversy. In the preamble to the proposed regulations, Treasury and IRS have taken the view that all equity swaps and other derivatives with a delta over 0.7 have “the potential for tax avoidance”.

A wide range of equity based instruments will be affected by the 2013 proposed regulations. While the dealer exceptions are welcome, systems will still need to be developed for implementing certification and reporting requirements, and to comply with the aggregation rules.