IRS Kicks Substantial Equivalence Test Down The Road Again

On May 22, 2024, the IRS issued Notice 2024-44 (reproduced here), which once again extends the phase-in for Section 871(m) withholding. Broadly speaking, foreign persons may be subject to a 30% withholding tax under Section 871(m) on certain dividend equivalents paid or deemed paid to a foreign person with respect to a specified equity-linked instrument that references one or more dividend-paying U.S. equity securities. Specifically, Section 871(m) imposes withholding on (i) simple contracts with a delta of .8 or more, and (ii) complex contracts that fail to meet the substantial equivalence test. Under Notice 2024-44, Section 871(m), withholding on dividend equivalents applies only to delta-one transactions through 2026 and will not apply to other U.S. equity transactions until after 2026. Although "delta-one" has not been defined in IRS guidance, it is generally thought to mean a linear nearly one-to-one correlation. Accordingly, a delta-one transaction tracks the