Phase-In Period for Dividend Equivalent Payment Regulations Extended Further (Notice 2018-72)

Taxpayers have been provided with additional guidance for complying with the Code Sec. 871(m) regulations on dividend equivalent payments for 2019, 2020, and 2021. The Treasury Department and the IRS intend to amend the regulations to delay the effective/applicability date of certain rules. Further, certain phase-in periods provided in Notice 2016-76, I.R.B. 2016-51, 834, Rev. Proc. 2017-15, I.R.B. 2017-3, 437, and Notice 2017-42, I.R.B. 2017-34, 212, are extended.

Dividend Equivalent Payments

A dividend equivalent amount is essentially an amount directly or indirectly determined by reference to a U.S. dividend. Code Sec. 871(m) treats dividend equivalent payments as U.S. source dividends. These payments are subject to 30-percent withholding (or a lower treaty rate) if received by a nonresident alien or foreign corporation.

The Code Sec. 871(m) regulations include final and temporary regulations under Code Secs. 871(m), 1441, 1461, and 1473.

Phase-in Year for Delta-One and Non-Delta-One Transactions Extended

The effective/applicability date for the specified notional principal contract (NPC) rules under Reg. §1.871-15(d)(2) and the specified equity-linked instrument (ELI) rules under Reg. §1.871-15(e) will be revised. These rules will not apply to any payment made with respect to any non-delta-one transaction issued before January 1, 2021.

The IRS will take into account the extent to which the taxpayer or withholding agent made a good faith effort to comply with the Code Sec. 871(m) regulations in enforcing those regulations—

– —for any delta-one transaction in 2017 through 2020; and

– —for any non-delta-one transaction that is a Code Sec. 871(m) transaction under Reg. §1.871-15(d)(2) or Reg. §1.871-15(e) in 2021.

Further, the period when the IRS will take into account the extent to which a qualified derivatives dealer made a good faith effort to comply with the Code Sec. 871(m) regulations and the relevant provisions of the 2017 Qualified Intermediary (QI) Agreement is extended through 2020.

The 2017 QI Agreement will be revised so that a QDD will be treated as satisfying the obligations that specifically apply to a QDD under that agreement for 2017 through 2020. For this treatment to apply, the QDD must make a good faith effort to comply with the relevant provisions of the 2017 QI Agreement.

Simplified Standard for Determining Combined Transactions Extended

The period when the simplified standard applies for withholding agents to determine whether transactions entered into were combined transactions is extended to include 2019 and 2020. Transactions entered into in 2017 through 2020 that are combined under the simplified standard will continue to be treated as combined for future years. They will not stop being combined transactions by applying Reg. §1.871-15(n) (the combined transactions rule in the regulations), or by disposing of less than all of the potential Code Sec. 871(m) transactions that are combined under this rule.

Transactions entered into in 2017 through 2020 that are not combined under the simplified standard will not become combined transactions by applying Reg. §1.871-15(n) to them in future years, unless a reissuance or other event causes the transactions to be retested to determine whether they are Code Sec. 871(m) transactions.

Phase-In Relief for Qualified Derivatives Dealers Extended

Regarding qualified derivatives dealers (QDDs), Reg. §1.871-15(q)(1), Reg. §1.871-15(r)(3), and Reg. §1.1441-1(b)(4)(xxii)(C) will be amended so that a QDD will not be subject to tax on dividends and dividend equivalents received in 2019 and 2020 in its equity derivatives dealer capacity or withholding on those dividends (including deemed dividends). A QDD will have to compute its Code Sec. 871(m) amount using the net delta approach beginning in 2021.

A QDD will remain liable under Code Sec. 881(a)(1) for tax on dividends and dividend equivalents that it receives in any other capacity, and on any other U.S. source FDAP payments that it receives (whether or not in its equity derivatives dealer capacity). A QDD is also responsible for withholding on dividend equivalents it pays to a foreign person on a Code Sec. 871(m) transaction.

A QDD does not have to perform a periodic review with respect to its QDD activities for 2019 or 2020. However, a QDD must use the same year for the periodic review of its QI activities and QDD activities. A QI that is a QDD must choose 2021 or a later year within its certification period to perform its periodic review, unless its applicable certification period ends in 2020 or an earlier year.

Transition Rules Extended

Withholding agents may apply the qualified securities lender (QSL) transition rules described in Notice 2010-46, I.R.B. 2010-24, 757, for payments made in calendar year 2020.

Anti-Abuse Rule

The anti-abuse rule in Reg. §1.871-15(o) will continue to apply during the phase-in years. This means that a transaction that would not otherwise be treated as a Code Sec. 871(m) transaction (including as a result of the new guidance) might still be a Code Sec. 871(m) transaction under the anti-abuse rule.

Taxpayer Reliance

Taxpayers and withholding agents can rely on the new guidance before the Treasury and IRS amend the Code Sec. 871(m) regulations and the 2017 QI Agreement.

Notice 2018-72

Other References:

Code Sec. 871

– CCH Reference – 2018FED ¶27,343.1351

– CCH Reference – 2018FED ¶27,343.0441

– Code Sec. 1441

– CCH Reference – 2018FED ¶32,716.62

CCH Reference – 2018FED ¶32,716.034

CCH Reference – 2018FED ¶32,716.036

CCH Reference – 2018FED ¶32,716.038

CCH Reference – 2018FED ¶32,716.04

Code Sec. 1461

CCH Reference – 2018FED ¶32,828.01

Code Sec. 1473

CCH Reference – 2018FED ¶32,897.021

Tax Research Consultant

CCH Reference – TRC INTL: 3,558.252

CCH Reference – TRC INTL: 33,054.25

CCH Reference – TRC INTL: 33,104.05

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AUTHOR

CCHTaxGroup

All stories by: CCHTaxGroup