Dividend Equivalent Withholding Regulations Delayed until January 1, 2017

On May 8, 2015, I had the pleasure of speaking on a panel with Karl Walli, Senior Counsel (Financial Products), Office of Tax Legislative Counsel, U.S. Department of the Treasury, where I was able to quiz Karl about the proposed regulations under Section 871(m). Karl announced that the effective date for proposed regulations regarding U.S. withholding tax on dividend equivalent payments (e.g., payments on certain equity swaps or other derivatives referencing U.S. equity securities) has been postponed for one year from January 1, 2016, to January 1, 2017. As a result, current law will continue to apply for an additional year.

Under current law, U.S. withholding tax is only required on equity swaps where, (i) the parties “cross-in” or “cross-out” the underlying equity; (ii) the underlying equity is not publicly traded; or (iii) the underlying equity is posted as collateral for the swap.

The extra one year delay will allow funds to continue avoiding U.S. withholding tax on equity swaps entered into in accordance with Section 871(m). It also gives funds another year to build-out their systems to comply with the new 871(m) regulations which require funds to be withholding agents in certain circumstances.

In addition, Karl noted that the contingent swaps regulations will be re-proposed in the relatively near future. The contingent swap regulations were first proposed over a decade ago to address the timing of income recognition on swaps with contingent payments. The historical “wait and see” method allowed long swap holders to take ordinary deductions for their periodic funding payments but permitted long-term capital gains when the holder would eventually terminate the swap if it went in the money. The proposed contingent swap regulations disapproved of “wait and see” and proposed other accrual methods that forced current income inclusions such as mark-to-market.

If you have questions on swaps or the proposed regulations please contact your normal WithumSmith+Brown partner.

Anthony Tuths, JD, LLM


Categories: Uncategorized

3 replies

  1. Finally, will this new regulation apply to synthetic long stock options positions and dividend protected listed futures?

  2. Yes. The scope of the new regulations should be the same as the proposed regulations (according to Walli). So they will cover ALL equity derivative positions that have a delta above the specified threshold. So equity futures contracts (presumably both the 1C and 1D contracts) will be covered, as will deep in the money stock options, as well as put/call combos.
    Tony Tuths

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