Global Tax Alert (News from Americas Tax Center) | 7 March 2014

US IRS postpones application of 871(m) regulations to specified equity-linked instruments

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The US Internal Revenue Service (IRS) has announced in Notice 2014-14 its intention to amend the proposed Section 871(m) regulations when issued in final form so that they will apply to specified equity-linked instruments (ELIs) issued on or after the date that is 90 days after the publication of the final regulations, rather than applying them to specified ELIs acquired or entered by the long party on or after 5 March 2014, as initially proposed.

On 4 December 2013, the IRS released final and proposed regulations under Section 871(m), which treats certain dividend equivalents as US-source income subject to withholding when paid to a non-US person. Among other things, the proposed regulations would expand the definition of a dividend equivalent for purposes of Section 871(m) to include any payment made pursuant to a “specified ELI” that references a US-source dividend payment. For specified ELIs, the proposed regulations would apply to payments made on or after 1 January 2016, for an ELI that was acquired or entered into by the long party on or after 90 days after the publication of the proposed regulations (i.e., 5 March 2014). Thus, ELIs that met the definition of “specified ELIs” under the proposed Section 871(m) regulations were potentially subject to US gross basis tax, collectible by withholding, for all ELIs acquired or entered into by the long party on or after 5 March 2014.

The IRS received comments asking to postpone the expansion of the definition of dividend equivalents to include specified ELIs to give market participants sufficient time to adapt. Accordingly, the IRS issued Notice 2014-14 to announce that, when it finalizes the proposed regulations, it will limit their application to specified ELIs issued on or after 90 days after the publication of the final regulations. The IRS invites additional comments on the change.

Implications

The Notice comes as welcome relief to non-US investors and withholding agents alike, who would otherwise have been required to program their systems to track ELIs acquired on or after 5 March 2014, without any assurance that those ELIs would ultimately have been subject to US tax (e.g., because the final Section 871(m) regulations could contain a narrower definition of “specified ELI” than the proposed Section 871(m) regulations contain).

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Washington, DC
  • Alan Munro
    +1 202 327 7773
    alan.munro@ey.com
  • Matthew Stevens
    +1 202 327 6846
    matthew.ttevens@ey.com
  • Richard Larkins
    +1 202 327 7808
    richard.larkins@ey.com
Ernst & Young LLP, Transaction Tax, Washington, DC
  • David Garlock
    +1 202 327 8733
    david.garlock@ey.com
Ernst & Young LLP, Business Tax Advisory, New York
  • Marc Levy
    +1 212 773 1012
    marc.levy@ey.com

EYG no. CM4237