Dividend Equivalent Payments — Final And Temporary Regulations Issued

On Sept. 18, 2015, the IRS issued final regulations governing "dividend equivalent" payments made to foreign persons. The regulations retain the basic framework set forth in the regulations proposed on Dec. 5, 2013 (the "proposed regulations"), but incorporate several public comments made in response thereto.

Internal Revenue Code Section 871(m), which was enacted in 2010 to prevent dividend equivalent payments and substitute dividend payments that are based on U.S. corporate dividends from escaping U.S. federal income taxation, treats a dividend equivalent payment as U.S. source income and thus generally subject to a 30% U.S. federal tax (unless such payment is effectively connected with the payee's U.S. trade or business, or the rate is eliminated or reduced by treaty). Under the final regulations, a dividend equivalent payment is generally any payment that references the payment of a U.S. source dividend made pursuant to (i) a securities lending transaction or