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| {{isdaanat|871(m) amendment}} | | {{nman|isda|2002|871(m) amendment}} |
| [[Section 871(m)]] of the [[Internal Revenue Code]] clamps down on dirty foreigners avoiding [[withholding tax]] for dividends on US [[Share - Equity Derivatives Provision|equities]]. Previously, US dividend [[Withholding tax|withholding]] did not apply to returns on notional principal contracts and instruments linked to underlying US equities.
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| That’s all changed now.
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| The new regulations will establish up to a 30% [[withholding tax]] on foreign investors on dividend-equivalent payments under [[equity derivative|equity derivatives]]. There are a wide range of products that fall into this camp including [[swap]]s, [[option]]s, [[future]]s, [[convertible bond|convertible debt]], [[structured note|structured notes]] and other customised derivative where the ...
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| ===Beware of {{tag|Greeks}}===
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| ... [[delta]] (see what I did there?) against the underlying stock is .08 or greater.
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| {{delta}}
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| 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.
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| It applies from 1 January 2017.
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| ===So does that mean I can bin all this [[hypothetical broker-dealer]] nonsense?===
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| [[There’s no bright line test]], obviously.
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| Since [[871(m)]] means that {{tag|WHT}} is now applied on [[high-delta equity derivative]]s in the same way it applies to physical cash trades, the [[recharacterisation]] risk is surely less fraught now, isn’t it? do we really care whether the counterparty controls the hedge? Can we therefore get rid of that tiresome “[[hypothetical broker-dealer]]” language, which so mightily confuses many counterparties, and just reference the actual hedge liquidation price as the closing price of the derivative?
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| No, because [[871(m)]] does not apply to all underliers that might feature in a [[synthetic equity]] transaction. and also because there are [[WHT]] and [[stamp duty]] regimes in other jurisdictions ([[SDRT]] on UK equities for example) where a derivative acheives preferential tax treatment over a cash equity trade.
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| But you’re right: the [[hypothetical broker-dealer]] business ''is'' [[Don’t take a piece of paper to a knife fight|ridiculous]].
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| {{seealso}}
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| *[[ISDA 2015 Section 871(m) Protocol]]
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| *[[Synthetic prime brokerage]]
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| *[[Don’t take a piece of paper to a knife fight]]
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| {{c|tax}}
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