Final qualified intermediary agreement includes qualified derivatives dealer provisions

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January 2017


The Internal Revenue Service (IRS) on December 30, 2016 issued Rev. Proc. 2017-15 setting forth the final qualified intermediary (QI) withholding agreement (2017 QI Agreement). Non-US entities and certain foreign branches of US entities may enter into the 2017 QI Agreement with the IRS to simplify their obligations as withholding agents under Chapters 3 and 4 (Foreign Account Tax Compliance Act or FATCA) of the Internal Revenue Code (Code) and as payers under Chapter 61 and Section 3406 of the Code for amounts paid to their account holders.

The 2017 QI Agreement allows certain non-US derivatives dealers and securities lenders that are QIs to enter into an agreement with the IRS to act as qualified derivative dealers (QDDs) with respect to transactions that give rise to payments with respect to Code Section 871(m) transactions and substitute interest. The QDD regime addresses the problem of cascading or over-withholding on certain derivatives and securities lending transactions by providing that no withholding tax is required on certain payments made to a QDD when it is acting as a principal.

Rev. Proc. 2017-15 follows Notice 2016-42, which was issued in July 2016 and set forth a proposed QI agreement (2016 Proposed QI Agreement) that contained provisions setting out terms and requirements for QDDs. The IRS requested and received many stakeholder comments on the 2016 Proposed QI Agreement. The 2017 QI Agreement (including the QDD provisions) responds to certain of those comments, and implements the guidance set forth in Notice 2016-76 which delayed many of the provisions related to Code Section 871(m). See our Insight: IRS notice provides relief under Section 871(m) regulations and qualified derivatives dealer regime for more information on Notice 2016-76.

Provisions of the 2017 QI Agreement also reflect anticipated updates made by the government modifying certain provisions of the Section 871(m) regulations. The IRS has indicated that revised final Section 871(m) regulations are expected to be published as early as January 2017.

A number of major changes in the 2017 QI Agreement relate to QDDs. For example, the 2017 QI Agreement:

  • expands the type of entity that can act as a QDD to include bank holding companies and their subsidiaries,
  • re-defines the Section 871(m) amount used in computing the QDD tax liability to incorporate a ‘net delta’ concept,
  • provides that, during 2017, a QDD will not be liable for tax on the receipt of actual/deemed dividends or dividend equivalent amounts that it receives in its capacity as an equity derivatives dealer,  
  • contains provisions for the extension of the qualified securities lender (QSL) regime through 2017, and
  • requires a QDD to prepare a detailed reconciliation schedule with respect to its Section 871(m)-related operations.

Observation: While the guidance provided in the 2016 Proposed QI Agreement and the 2017 QI Agreement is helpful, there remain many open issues for QDDs that must be addressed in future Section 871(m) regulations. The government has deferred addressing some of the most difficult aspects of QDD status until 2018.

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Dominick Dell'Imperio

Dominick Dell'Imperio

Partner, PwC US

Kevin Brown

Kevin Brown

Principal, Tax Controversy and Regulatory Services Leader, PwC US

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