U.S. QI: Effective Date of Certain Dividend Equivalent Regulations Postponed

Last week, there were developments regarding the highly anticipated section 871(m) regulations and updates to the notional principal contract (“NPC”) regulations.  These developments signal that the IRS and Treasury are continuing to work on guidance regarding swaps and further guidance can be expected over the coming months.

Most significantly, officials from the Treasury Department announced that the regulations fully implementing the new section 871(m) regime will be delayed at least another year, so the new rules will not be effective prior to 1 January 2017.  The December 2013 proposed regulations had promised a 1 January 2016, effective date.  The section 871(m) regulations are still expected to create a new tax (and withholding) regime that would ensure that foreign investors in most derivatives over U.S. dividend-paying stocks cannot get a better tax (and withholding) result from gaining economic exposure to the dividend-paying stock through a derivative than they would have gotten had they invested directly.

PwC Insight: While the deferral of the proposed regulations are welcomed, the smaller set of final section 871(m) regulations issued in December 2013, relating to specified notional principal contracts, will be  effective for payments made on or after 1 January 2016.  Absent an announcement from Treasury pushing these regulations back to 1 January 2017, this will require dealers and market participants to create systems within the next 6 and a half months to comply with section 871(m)(3)(B) and final regulation 1.871-15(d).

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