Country / Language

IRS Releases Section 871(m) Guidance for Derivatives Contracts


Synopsis
 
The IRS recently released Notice 2016-76 to alleviate challenges faced by taxpayers and withholding agents in implementing certain aspects of the Section 871(m) regulations by their effective date of January 1, 2017. Section 871(m) and the associated final and temporary regulations require withholding on dividend equivalent payments remitted to non-US persons.    
 
Issue
 
A derivative contract’s delta generally reflects the ratio of a change in the value of the derivative contract relative to the change in the value of the asset referenced by the derivative.  The change in the value of a “delta one” contract generally corresponds with the change in the value of the underlying referenced asset.  The value of a derivative with a delta of .90, for example, would increase or decrease in an amount equal to 90% of the change in the value of the underlying referenced asset.
 
Notice 2016-76 provides for the following phase-in schedule of the regulations:
 
  • Section 871(m) will only apply to any payment made with respect to a delta one contract issued before January 1, 2018.
  • For 2017, the IRS will take into account the extent to which the taxpayer or withholding agent makes a good faith effort to comply with the Section 871(m) regulations associated with any delta one contracts.
  • For 2018, the IRS will take into account the extent to which the taxpayer or withholding agent makes a good faith effort to comply with the Section 871(m) regulations in enforcing any non-delta one contracts.  
  • For 2017, withholding agents may rely on a simplified standard for determining whether transactions are combined.
  • For 2017, withholding agents may remit amounts withheld for dividend equivalent payments on a quarterly basis.
  • The Section 871(m) regulations will not apply to certain exchange traded notes specifically identified in the notice until January 1, 2020.
  • Additional relief is provided for Qualified Derivatives Dealers.
 
What does CohnReznick think?
 
Notice 2016-76 offers much welcomed relief in applying the Section 871(m) regulations.  Many investment funds will see additional withholding on dividend equivalents starting in 2017 for their delta-one transactions. Further, U.S.-domiciled funds will be the withholding agent and required to remit withholding on dividend equivalent payments. 
 
It is very important for fund managers to communicate with their brokers to ensure that they will provide the information needed to comply with the Section 871(m) withholding obligations.
 
Contact
 
For additional information on Section 871(m) please contact either - Robert Richardt, Tax Partner, Financial Services Practice at 646-625-5736, or David Logan, Partner, Tax Practice Leader Financial Services Practice at 646-601-7794. 
 
 
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 
 
Search Our People

Search Our People

Look ahead. Gain insight. Imagine more. Is your business ready to break through?

View our new TV commercial..

Industry Outlooks

Industry Outlooks

Gain insight into what is ahead for the Commercial Real Estate, Technology and Middle Market Private Equity industries.

READ MORE

Learn about our upcoming events.

READ MORE

Working With Us

Working With Us

What makes CohnReznick different from others in our profession? And what should our clients come to expect when working with us? The answer is The CohnReznick Advantage. Contact us to learn how we can out the CohnReznick Advantage to work for your business.


People

The value of an organization is determined by the skills and qualities of its leaders. With more than 280 partners serving clients nationwide, CohnReznick is renowned for the diverse experiences, knowledge and backgrounds of its leadership.

Learn More

Services

We align our services in three segments: Accounting and Assurance, Tax, and Advisory. This approach allows us to provide holistic solutions to complex business problems and to seize upon opportunities requiring an integrated approach.

Learn More

Industries

Accounting and tax issues different significantly based on an organization's industry. We provide clients with expertise in nearly two dozen industries – we know the opportunities, the obstacles, the competitive landscape.

Learn more

Insights

CohnReznick professionals are thought leaders in their industries. Clients benefit from relevant and timely economic, legislative and industry insights that can keep them a step ahead of competition.

Learn More

Global Reach

Our involvement in the Nexia International network of firms enables us assist our clients wherever they do business-providing local expertise and connections wherever they needed. Nexia is comprised of 20,000 professionals operating in over 100 countries.

Learn More