Chamber of Commerce Asserts that Dividend Equivalent Proposed Regulations Are Too Broad and Could Hurt American Businesses; Related IRS Notice

In a February 27 letter to the IRS, the Chamber of Commerce raised serious concerns with proposed regulations under Section 871(m) of the Internal Revenue Code that, commencing in 2016, would impose a 30% withholding tax on "dividend equivalent payments" made, or deemed made, to non-U.S. investors that own certain derivatives that reference dividend-paying U.S. stocks. According to the Chamber, the instruments covered by the proposed regulations, such as convertible bonds and options, forwards, futures and structured notes (even if there is no dividend component in the instrument), are outside the intended scope of Section 871(m) and will adversely impact the ability of non-financial businesses to access capital through efficient and recognized channels. Section 871(m) was enacted by Congress in 2010 to prevent avoidance of U.S. withholding tax on dividends paid on U.S. stocks to non-U.S. investors who acquire derivative ownership of the stock rather than actual ownership. In the Chamber's view, the proposed 871(m) rules would undermine the "bedrock of innovation and efficiency that our financial markets have been built upon" and "make it less likely for foreigners to participate in American financial services market . . . thereby raising the costs of capital for Main Street businesses, harming the efficiencies of those capital markets and reducing the amount of capital available to fuel economic growth and job creation." The Chamber asked that the proposed regulations be "stayed" until an economic analysis is performed and released for public comment and that the IRS hold a roundtable composed of Treasury officials, financial institutions and their customers, to identify unintended consequences and the costs and burden of the proposed rules.

Also, on March 4, the IRS issued Notice 2014-14 grandfathering equity-linked instruments (other than equity swaps) issued prior to 90 days after the regulations are finalized from the new Section 871(m) withholding rules.

See: Chamber of Commerce Letter; IRS Notice 2014-14.For more information, please contact Daniel Mulcahy and Mark Howe.