Transitional Relief for Equity-Linked Products but Challenges Remain
Taxpayers and withholding agents face challenges in complying with the withholding rules for dividend equivalent payments under section 871(m) of the Internal Revenue Code (the Code). These challenges affect dealers, banks, parties with indirect exposure to U.S. equities, withholding agents, and intermediaries. While Congress enacted section 871(m) in 2010, and it became effective for certain types of contracts that year, the full scope of section 871(m) has been the subject of ongoing discussions between the US Treasury Department, the Internal Revenue Service, and industry participants. In late 2015, the US Treasury Department and the IRS released final, temporary, and proposed regulations outlining the scope of 871(m) that were largely responsive to industry input.
Nonetheless, significant questions remained under section 871(m) following the release of these regulations. The IRS addressed some open issues in guidance released on 2 December 2016. That guidance, issued in Notice 2016-76, addresses the challenges market participants face by providing transitional relief and answering several (but not all) open questions.