On September 17, 2015, the Treasury Department and the Internal Revenue Service (the “IRS”) issued new temporary and final regulations under section 871(m) of the Internal Revenue Code regarding the imposition of US federal withholding tax on certain equity-linked instruments. Under the final regulations, the general framework set forth in regulations proposed in 2013 was retained, including the delta standard for determining whether “simple” contracts relating to US equity securities are subject to US federal withholding tax. The final regulations, however, increased the delta standard from 0.70 to 0.80, requiring a stronger economic correlation between the contract and the underlying securities in order for the contract to be subject to withholding. The final regulations require that a contract’s delta be tested only at the contract’s issuance, which effectively excludes most convertible debt from being treated as section 871(m) transactions. For “complex” contracts (i.e., those that reference a number of securities that may change over time), the temporary regulations set forth a “substantial equivalence” test for determining whether US federal withholding tax will apply. The final and temporary regulations make a number of other important changes, which are discussed in detail below.
View full memo, Final Regulations Under Section 871(m) Clarify Withholding Tax Rules for Equity-Linked Derivatives, Yet Many Challenges Remain