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Abstract: 

In general, nonresident aliens are subject to a 30 percent withholding tax on U.S.-source dividend income, but until 2010, they could engage in swaps and other similar transactions that mimicked the economic consequences of investments in U.S. stocks, and thus avoid withholding taxes on dividend-equivalent payments. Congress enacted Section 871(m) in an attempt to remedy this disproportionate tax treatment. Subsequent to a seven-factor test proposed in 2012, and after a period of commentary, Treasury adopted an objective “delta” analysis in proposed regulations in 2013, to determine whether a transaction falls within the purview of Section 871(m). These regulations were amended (with corrections) and finalized in 2015; in December 2016, Treasury promulgated new final regulations. These regulations redesign the landscape, creating a distinction between “simple contracts” and “complex contracts.” The delta test is continued for simple contracts, but to determine whether complex contracts are within the scope of Section 871(m), the regulations adopt the new “Substantial Equivalence Test.”

Keywords: substantial equivalence test, Section 871(m) transaction, dividend equivalent, notional principal contract, equity-linked instrument

Affiliations:  1: New York Law School.