New 871(M) Regulations Finalize Dividend Equivalent Payment Withholding Rules For Equity Derivatives

Introduction

On September 17, 2015, the IRS and the Treasury Department issued final, temporary, and proposed regulations under section 871(m) of the Internal Revenue Code (collectively, the "new regulations") that provide the rules for withholding on "dividend equivalent payments" on derivatives that reference U.S. equity securities.¹ In general, the rules narrow the class of derivatives that would have been subject to withholding under the proposed regulations issued in 2013 (the "2013 proposed regulations").²  For example, under the new regulations, a "simple contract" is not subject to withholding unless its delta is 0.80 or more whereas, under the 2013 proposed regulations, withholding would have been imposed if the delta was at least 0.70.³ However, the new regulations still require withholding on "price return only" derivatives that do not provide for payments that reference dividends.⁴