Dividend Equivalents: Past, Present and Future

Read Publication

Code §871(m) of the Code was enacted as part of the H.I.R.E. Act on March 18, 2010 and treats “dividend equivalents” as U.S. source dividends for withholding tax purposes. On January 23, 2012, Temporary Regulations (the “2012 Temporary Regulations”) and a notice of proposed rulemaking (the “2012 Proposed Regulations”) were published. The 2012 Proposed Regulations and Temporary Regulations provided guidance relating to U.S. source dividend equivalent payments made to nonresident individuals and foreign corporations. They also provided guidance to withholding agents. Correcting amendments to the 2012 Temporary Regulations were published on February 6, 2012, on March 8, 2012 and on August 31, 2012. On December 5, 2013 new proposed regulations (the “2013 Proposed Regulations”) withdrew the 2012 Proposed Regulations. In addition and at the same date, final regulations (“2013 Final Regulations”) were published that essentially adopted the 2012 Temporary Regulations.

BACKGROUND

Code §871(m) defines a dividend equivalent as one of the following:

• Any substitute dividend made pursuant to a securities lending or a salerepurchase transaction that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States;
• Any payment made pursuant to a specified notional principal contract (“N.P.C.”) that (directly or indirectly) is contingent upon, or determined by reference to, the payment of a dividend from sources within the United States; and
• Any other payment determined by the Secretary to be substantially similar to a payment described in the two previous categories (a substantially similar dividend).