Senior counsel for the Treasury Office of Tax Legislative Counsel announced today that the effective date for proposed regulations regarding U.S. withholding tax on dividend equivalent payments (e.g., payments on certain equity swaps or other derivatives referencing U.S. equity securities) has been postponed for one year from January 1, 2016, to January 1, 2017. As a result, current law will continue to apply for an additional year.
This is very good news for the hedge fund industry (and the broader financial community) as the proposed regulations have been criticized for their complexity and breadth. This extension postpones what will almost certainly be very complex rules for determining what amounts constitute dividend equivalents, which are subject to 30% U.S. withholding tax or lower treaty rate, if applicable.
Under current law, which will continue to apply until the effective date, no tax is required to be withheld with respect to an equity swap if: you did not “cross-in” or “cross-out” of the security; the security is not a private security; and the security is not posted as collateral for the swap. Hopefully, the extension gives Treasury time to develop regulations that are more amenable to the financial community and will provide the markets sufficient time to digest and prepare for the new rules.