ISDA Requests Delay of Effective Date for Dividend Equivalent Regulations

The North American Tax Committee of ISDA requested that the U.S. Treasury Department ("Treasury") and the IRS postpone the effective date of the soon-to-be-released final regulations under Section 871(m) of the Internal Revenue Code until January 1, 2017.

The regulations require that up to 30 percent withholding tax be collected on payments to non-U.S. persons of dividend equivalents under certain equity swaps. The subject equity swaps are referred to as specified "Notional Principal Contracts" ("NPCs"), and other "equity linked instruments" ("ELIs") that reference U.S. dividend paying stocks. The regulations would impose such withholding tax on derivatives commencing on January 1, 2016. ISDA also asked for "delta one" NPCs and ELIs that are entered into or issued on or before the 90th day after the regulations are finalized to be grandfathered from withholding, and for all other NPCs and ELIs issued prior to January 1, 2017 to be grandfathered as well.

According to ISDA, the requested delay and grandfathering are necessary to permit withholding agents to build systems to ensure that the withholding regime set forth in the regulations will be applied properly and consistently. ISDA argued that even if the final regulations were issued in the next few weeks, there would be insufficient time for withholding agents to digest the regulations, build systems, make documentation changes and collect tax forms to meet a January 1, 2016 effective date.

See: ISDA Request for Delay in Application of Final Regulations.