The Internal Revenue Service on 2 December 2016 issued Notice 2016-76 to provide guidance on compliance in 2017 and 2018 with the final and temporary regulations issued under sections 871(m), 1441, 1461 and 1473 of the US Internal Revenue Code (IRC).
These regulations will have a significant impact on asset managers whose portfolios contain instruments linked to US equities, including a broad range of equity derivatives as well as equity-linked notes and convertible debt instruments.
IRC section 871(m) treats a “dividend equivalent” as a dividend from sources within the United States for purposes of the US gross basis income tax. Dividend equivalents, if paid to non-resident foreign persons, are subject to the 30% withholding tax that applies to fixed or determinable annual or periodical (FDAP) income from US sources, and also subject to FATCA withholding under chapter 4 of the IRC.
Notice 2016-76 provides for the phased-in application of the section 871(m) regulations that were finalized in 2015. Notice 2016-76 provides that the section 871(m) regulations only apply to delta-one transactions (i.e. transactions that have a delta of one) in calendar year 2017, and will apply to non-delta-one transactions beginning in calendar year 2018.
