Long-Awaited Treasury Announcement Benefits Fund Managers and Traders

In response to push back from various industry leaders, the Treasury Department and the Internal Revenue Service recently issued Notice 2016-76, which announced that implementation of the dividend equivalent withholding rules under IRC section 871(m) will be delayed. Generally, this withholding regime is designed to eliminate the utility of equity-linked instruments (“ELI”) by foreign parties. ELIs were designed to allow foreign parties to economically benefit from dividends generated by the foreign party’s equity positions in U.S. securities without suffering the U.S. withholding on the dividend. This withholding could be as high as 30 percent, unless an income tax treaty provided for a reduced rate of withholding. Under this new withholding regime, any such ELI would be subject to U.S. withholding as well.

The regulations utilize a Delta metric, which is generally understood to be the measurement of the fair market value of the ELI parties compared to the underlying value of the U.S. security. Contracts are generally, divided between Delta-one and non-Delta-one transactions. The closer the Delta is to one, the more likely that the foreign party is mimicking the economics of the U.S. dividend and should be subject to withholding. Under the delayed implementation timeline, Delta-one contracts will be subject to withholding if they are entered into after January 1, 2017. However, non-Delta-one contracts will remain exempt from withholding for all such contracts that are entered into prior to January 1, 2018. Additionally, the IRS will treat tax years 2017 and 2018 as phase-in years for enforcement with this new regime.

Fund managers and traders should find relief in the phased-in enforcement of these rules, which will give the banking and investment management industry the time needed to adapt to these new rules. Arthur Bell will continue to monitor the implementation dates of this withholding regime and keep you informed of deadlines and action items. For more information regarding these changes and how you may be affected, please contact your Arthur Bell advisor at 855-787-0001 or via email at contactus@arthurbellcpas.com.

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