Template:Isda 871(m) amendment summ: Difference between revisions
Amwelladmin (talk | contribs) Created page with "Section 871(m) of the Internal Revenue Code clamps down on dirty foreigners avoiding withholding tax for dividends on US equities. Previously, US dividend withholding did not apply to returns on notional principal contracts and instruments linked to underlying US equities. That’s all changed now. The new regulations will establish up to a 30% withholding tax on foreign investors on dividend..." |
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[[Section 871(m)]] of the [[Internal Revenue Code]] | Before [[Section 871(m)]] of the [[Internal Revenue Code]] was enacted, non-resident investors in US equities suffered 30% withholding on US-source taxable income — dividends, in other words. This was in practice mediated by double tax treaties in may jurisdictions, but that is the principle, and it remains the case. However previously, US dividend [[Withholding tax|withholding]] did not apply to returns on notional principal contracts and instruments linked to underlying US equities. [[Equity derivatives]], for example. It was therefore more efficient to invest in US equities through contracts for difference and equity swaps. You will never guess what tax-savvy offshore investors therefore tended to do. | ||
Yes! You’re right! They invested in swaps all the time! | |||
The | The HIRE Act, by amending Section 871(m), clamps down on naughty foreigners avoiding [[withholding tax]] for dividends on US [[Share - Equity Derivatives Provision|equities]] and provides that everyone gets taxed at the same rate. | ||
The calculation is cumulative so even if the delta threshold isn’t met in one transaction, it may be as a result a connected transaction. | The new regulations establish up to a 30% [[withholding tax]] on foreign investors on dividend-equivalent payments under [[equity derivative|equity derivatives]]. | ||
====What counts as an in-scope equity derivative?==== | |||
The thing about derivatives is they can easily be “funked up”. This was great fun in 2005 but honestly, in this day and age, they tend not to so much. It is all very formulaic and pass-through. But you can imagine naughty Johnny Foreigner making some tiny little, formalistic, funky change to a swap payoff and claiming it is no longer a derivative of a US equity. | |||
US tax people are cleverer than that and decreed an option delta of more than 80% counts as an in-scope equity derivative. | |||
There are a wide range of products that fall into this camp including [[swap]]s, [[option]]s, [[future]]s, convertible debt, [[structured note]]s and other customised derivatives — as long as the [[delta]] against the underlying stock is .08 or greater. | |||
The calculation is cumulative so even if the delta threshold isn’t met in one transaction, it may be as a result a connected transaction. (Foiled, tricksy foreigners!) | |||
Revision as of 16:38, 22 June 2023
Before Section 871(m) of the Internal Revenue Code was enacted, non-resident investors in US equities suffered 30% withholding on US-source taxable income — dividends, in other words. This was in practice mediated by double tax treaties in may jurisdictions, but that is the principle, and it remains the case. However previously, US dividend withholding did not apply to returns on notional principal contracts and instruments linked to underlying US equities. Equity derivatives, for example. It was therefore more efficient to invest in US equities through contracts for difference and equity swaps. You will never guess what tax-savvy offshore investors therefore tended to do.
Yes! You’re right! They invested in swaps all the time!
The HIRE Act, by amending Section 871(m), clamps down on naughty foreigners avoiding withholding tax for dividends on US equities and provides that everyone gets taxed at the same rate.
The new regulations establish up to a 30% withholding tax on foreign investors on dividend-equivalent payments under equity derivatives.
What counts as an in-scope equity derivative?
The thing about derivatives is they can easily be “funked up”. This was great fun in 2005 but honestly, in this day and age, they tend not to so much. It is all very formulaic and pass-through. But you can imagine naughty Johnny Foreigner making some tiny little, formalistic, funky change to a swap payoff and claiming it is no longer a derivative of a US equity.
US tax people are cleverer than that and decreed an option delta of more than 80% counts as an in-scope equity derivative. There are a wide range of products that fall into this camp including swaps, options, futures, convertible debt, structured notes and other customised derivatives — as long as the delta against the underlying stock is .08 or greater.
The calculation is cumulative so even if the delta threshold isn’t met in one transaction, it may be as a result a connected transaction. (Foiled, tricksy foreigners!)