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Volume XII, Number 147

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IRS Phases in Section 871(m) Dividend Equivalent Withholding

On December 2, the U.S. Internal Revenue Service issued Notice 2016-76, which phases in the application of withholding on dividend equivalent payments under Section 871(m). Under the notice, withholding applies only to delta-one transactions in 2017, and applies to other U.S. equity transactions beginning after 2017. A delta-one transaction tracks the underlying on a dollar-for-dollar basis.

In addition, the notice generally provides that:

  • When enforcing section 871(m) in 2017 (for delta-one transactions) and 2018 (for non-delta-one transactions), the IRS will take into account the extent to which the taxpayer or withholding agent made a good faith effort to comply with section 871(m).

  • In 2017, withholding agents will be required to combine transactions for purposes of determining whether the transactions are subject to withholding under section 871(m) only if the transactions are over-the-counter transactions and are priced, marketed, or sold in connection with each other.  (This simplified standard applies only to withholding agents, and not to long parties.  Thus, a long party may still owe substantive tax with respect to equity-linked derivatives that are entered into in connection with each other and, when combined, have a delta of at least .80, even if the withholding agent does not withhold.)

  • The IRS intends to revise the proposed QI agreement issued under Notice 2016-42 to (1) impose withholding on actual dividends paid to a QDD, (2) calculate a QDD’s tax liability under section 871(m) by reference to the QDD’s "net delta exposure," and (3) provide additional phase-in rules for QDDs for 2017.  

  • Withholding under section 871(m) will not apply until 2020 to certain existing exchange-traded notes that are specifically identified in the notice.

A copy of Notice 2016-72 can be found here

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume VI, Number 340
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About this Author

Brian Foster, Cadwalader, interest rate lawyer, currency hedging arrangements attorney
Partner

Brian Foster is a Partner in Cadwalader's Financial Services Group and represents financial institutions in a wide range of transactional and regulatory matters. He represents both sell-side and buy-side clients in connection with financing transactions to funds of funds, hedge funds, private equity funds and mutual funds, including term and revolving loans, VFN facilities, repurchase, securities lending and prime brokerage transactions, and various derivatives, together with related currency and interest rate hedging arrangements. He also advises clients on the...

212 504 6736
Mark P. Howe, Cadwalader Law Firm, Corporate Taxation Attorney
Partner

Mark Howe's practice is concentrated in partnerships, financial products, securitization, the tax aspects of capital markets, general corporate finance, securities, and commodities. His work includes emphasis on the tax structuring of domestic and offshore investment funds and in the development, structuring, and implementation of a wide variety of financial and derivative products and transactions, such as fixed income, currency, equity, and commodity linked swaps, forwards, notes, options, and similar instruments and transactions, securities and other instruments with...

202-862-2236
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