Treasury Extends Effective Date of Temporary Regulations on Dividend Equivalent Payments

The Treasury Department has just published an amendment to the temporary regulations that were issued earlier this year under Section 871(m) of the Internal Revenue Code of 1986, as amended (the “Code”).¹ Very generally, Section 871(m) imposes withholding tax on gross payments to non-U.S. persons that are contingent on, or determined by reference to, the payment of U.S. source dividends and made pursuant to certain types of equity swaps.²

The temporary regulations, as originally issued, extended the statutory regime of Section 871(m) to payments made after March 18, 2012 (when the regime was, by its terms, set to change and to apply more broadly to all swaps going forward) and before January 1, 2013. The amendment extends the applicability of the temporary regulations (and, thus, the initial statutory regime), until January 1, 2014.

The Treasury Department expects to issue final regulations (adopting proposed regulations which were issued at the same time as the temporary regulations) that will apply to payments made on or after January 1, 2014. Please see our previous client alert here, discussing Section 871(m) and the temporary and proposed regulations.  

This amendment will allow taxpayers to continue to rely on the more lenient existing regime for another year while Treasury continues its work on the final regulations, which are expected to be more stringent.

¹ Except where otherwise specified, all section references in this client alert are to the Code.
² Section 871(m) also authorizes Treasury to expand the rules to cover other types of equity linked contracts.

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