On January 19, 2012, the Treasury Department and the Internal Revenue Service (the “IRS”) released temporary and proposed regulations under section 871(m) of the Internal Revenue Code regarding the imposition of US federal withholding tax on certain equity swap payments. Under the temporary regulations, swap payments made after March 18, 2012, but prior to January 1, 2013, will continue to be subject to the existing sourcing rules contained in section 871(m). Beginning January 1, 2013, however, payments contingent on or determined by reference to dividends on US equities made under swaps and certain other financial instruments that fall within any one of seven categories of “specified notional principal contracts” set forth in the proposed regulations would generally be treated as US source income under section 871(m) and thus potentially subject to US withholding tax. This would include payments made in 2013 and thereafter on swaps that are currently in place, as well as swaps executed during the remainder of 2012.
View full memo, "Temporary and Proposed Regulations Regarding U.S. Withholding Tax on Certain Equity Swap Payments"