This Memorandum updates our prior coverage of the implementation of U.S. federal withholding tax on dividend equivalent payments on transactions referencing U.S equities.1 In particular, this Memorandum updates our August 2017 Memorandum, in which we discussed the extension of the phase-in period of the Section 871(m) rules.
Pursuant to IRS Notice 2018-72 (the “2018 Notice”), the 871(m) regulations are delayed with respect to “non-delta-one transactions”.2 As discussed in our December 2016 memorandum, starting January 1, 2017 parties were required to withhold at a rate of 30% (or at a reduced rate of withholding if benefits of a tax treaty are available) of the amount of dividend-equivalent payments on delta-one transactions. This phase-in period was scheduled to expire on January 1, 2019. The 2018 Notice extends the application of withholding on non-delta-one transactions until January 1, 2021.
The 2018 Notice also extends the application of the “good faith” standard imposed on withholding agents and taxpayer to comply with the 871(m) regulations and the simplified standard for treating transactions as “combined transactions”. The relief to qualified derivative dealers described in the August 2017 Memorandum is likewise extended. Taxpayers may rely on the 2018 Notice until the IRS updates relevant sections of the Treasury Regulations implementing Internal Revenue Code section 871(m).
For additional information on recent tax developments, please contact Jonathan P. Brose (212-574-1615), James C. Cofer (212-574-1688), Ronald P. Cima (212-574-1471), Peter E. Pront (212-574-1221), Daniel C. Murphy (212-574-1210) or Brett R. Cotler (212-574-1269).
______________________________________________________
1 We have previously published memoranda discussing the development and implementation of the Section 871(m) rules in December 2016, in October 2015, in December 2013, and in February 2012.
2 Delta-one transactions have a delta of one. A transaction’s delta is the ratio of the value of the contract to the value of the referenced asset(s). A non-delta-one transaction is a transaction that is not a delta-one transaction. Where a delta is greater than 0.80, a non-delta-one transaction where the delta is 0.80 or greater will generally be subject to 871(m) withholding after the phase-in period ends.
