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Tax News
Hearing Date on the Section 871(m) Proposed Regulations Approaches
April 25, 2012
Administrative Actions
For those who have not followed this closely, section 871(m) was enacted with the 2010 HIRE Act and shut down certain dividend equivalent strategies that utilized swaps in order to circumvent the U.S.withholding rules on dividends. Early this year the IRS issued proposed regulations that address the application of Section 871(m).  The proposed regulations on dividend equivalent payments have been in circulation for several months now and practitioners have had enough time to ruminate on their impact on the investment fund industry. Recently, in the advent of the April 27 proposed regulation hearing, a number of industry leaders, including CBOE, MFA and the Abu Dhabi Investment Council, commented on the proposed regulations. The comments echo similar concerns. The overarching concerns, at least in my opinion are: (1) the breath of the regulations and (2) the grandfathering of existing contracts.  First, as many have pointed out, the proposed regulations expand the nature and type of contracts that could be subject to withholding. This is very important since investment fund participants could be caught of guard and subject to withholding on seemingly routine contracts such as certain option spreads.  Second, the proposed regulations do not grandfather existing contracts.  If the final regulations do not provide such grandfathering, this could put significant burden on funds in scrambling to amend outstanding deals. I wanted to write this short note as a reminder to funds and their counsel to keep this issue on their list and follow the comments and the hearing.  As always, it is not clear to what extent the IRS will adopt any of the suggestions provided by the investment community, but a close familiarity with the proposed regulations, the comments, and the final regulations (when they come out) could save funds from unpleasant surprises down the road.
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Tags: dividend equivalent payments, Section 871(m), Section 871(m) proposed regulations