Withholding Tax on Dividend Equivalent Payments: IRS and Treasury Issue New Final and Proposed Regulations on Withholding Tax on “Dividend Equivalent Payments”

Sullivan & Cromwell LLP - September 21, 2015

On September 18, 2015, the Treasury Department and the IRS published final and temporary and proposed regulations (the “Final Regulations” and “Temporary and Proposed Regulations,” respectively) relating to the imposition of U.S. withholding tax on “dividend equivalent” payments on certain U.S. equity swaps and other U.S. equity-linked instruments held by foreign persons.  The Final Regulations clarify and modify the previously proposed regulations issued on December 5, 2013, (the “2013 Proposed Regulations” ).

The Final Regulations do not change the basic approach of the 2013 Proposed Regulations, which impose U.S. withholding tax in respect of long U.S. equity-linked derivative positions that have a “delta” in excess of a specified threshold (a “specified contract”), regardless of whether the instrument actually provides for dividend equivalent payments.  However, the Final Regulations make numerous changes that are designed to make the approach of the 2013 Proposed Regulations more workable and pragmatic.