IRS Issues Regulations on Withholding on "Dividend Equivalents"

Summary: In March of 2010, the Hiring Incentives to Restore Employment (“HIRE”) Act added a new Section, 871(m), to the Internal Revenue Code of 1986, as amended (the “Code”). Under the proposed section, “dividend equivalent” payments made to nonresident aliens and foreign corporations are subject to a 30 percent withholding tax to the same extent as are U.S.-source dividends. In addition, any payment determined in the Treasury Regulations to be “substantially similar” to payments described above is treated as a “dividend equivalent.” Last week, the Internal Revenue Service (“IRS”) issued temporary and proposed regulations under Section 871(m) of the Code. The temporary regulations extend through the end of this year the statutory definition of “specified notional principal contracts”, payments on which are treated as dividend equivalents, which definition would otherwise have expired on March 18. The proposed regulations expand that definition, applicable to payments made after the end of this year, and provide additional guidance with respect to withholding on dividend equivalents in general.