New Proposed Regulations Under Section 871(m) Adopt A Single Factor Test But Delay Effective Date Until 2016

On December 4, 2013, the Treasury Department and the Internal Revenue Service (the "IRS") released new final and proposed regulations under section 871(m) of the Internal Revenue Code regarding the imposition of US federal withholding tax on certain equity-linked payments. Under the final regulations, swap payments made prior to January 1, 2016 will continue to be subject to the existing sourcing rules contained in section 871(m). Under the proposed regulations, beginning January 1, 2016, payments made under swaps and certain other financial instruments with respect to US equities that have a "delta" of 0.7 or greater would be treated as US source income under section 871(m) and, thus, potentially subject to US withholding tax. The proposed regulations raise many difficult questions relating to tax policy, economic impact on markets and companies and administrability, among others.