United States: IRS Further Extends Phase-In Of Section 871(m) Regulations By 'Another' 2 Years

On September 20, 2018, the US Internal Revenue Service ("IRS") released Notice 2018-72 (the "Notice"),1 which further extends the phase-in of regulations under Section 871(m) of the Code2 (the "Regulations")3 and related provisions. Section 871(m) and its regulations generally treat "dividend equivalents" paid (or deemed paid) under certain contracts as US source dividends that are subject to withholding tax if paid to a non-US person.

Prior to the release of the Notice, the IRS had issued the following guidance on the Regulations:

  • Notice 2010-46 containing the qualified securities lender ("QSL") regime, published in June 2010;
  • Notice 2016-76 delaying the effective date of the Regulations, among other things, published in December 2016 and its corresponding final and temporary regulations published in January 2017;4
  • Revenue Procedure 2017-15 containing the final Qualified Intermediary Agreement (the "2017 QI Agreement"), published in January 2017; and
  • IRS Notice 2017-42 providing a similar phase-in of the Regulations and related provisions, published in August 2017.

The Notice provides for extensions to four areas related to Section 871(m): (1) the phase-in for non-delta-one transactions, (2) the simplified standard for determining whether transactions are "combined transactions" within the meaning of the Regulations, (3) relief for qualified derivatives dealer ("QDD") reporting5 and (4) the transition out of the qualified securities lender (the "QSL") regime. Each of these extensions is discussed in more detail below.

Extension of Phase-In for Delta-One and Non-Delta-One Transactions

Under previous IRS guidance, the Regulations would not apply to potential Section 871(m) transactions6 that were not delta-one and that were entered into before January 1, 2019. The Notice extends this relief for non-delta-one transactions to cover transactions entered into before January 1, 2021.7 This two-year extension is welcomed by the structured products market since a majority of structured products are non-delta-one transactions.

The Regulations still apply to any potential Section 871(m) transaction that has a delta of one entered into on or after January 1, 2017.

Previous IRS guidance provided that 2017 and 2018 would be phase-in years for delta-one transactions, meaning that the IRS would take into account a taxpayer's or withholding agent's good faith effort8 to comply with the Regulations when enforcing the same. Prior guidance also provided that in 2019 non-delta-one transactions would be reviewed on this good faith standard. The Notice extends this more lenient enforcement standard through 2020 for delta-one transactions and provides that examinations of non-delta-one transactions will use the good faith standard through 2021. Additionally, previous IRS guidance provided that the IRS would take into account the extent to which a qualified derivatives dealer made a good faith effort to comply with the Regulations and the relevant provisions of the 2017 QI Agreement through 2018. The Notice extends this similar good faith enforcement standard through 2020.

Extension of the Simplified Standard for Determining Whether Transactions Are Combined Transactions

IRS guidance provides for a simplified standard for withholding agents to apply in determining whether two or more transactions should be combined in order to determine whether the transactions are subject to Section 871(m), namely that a broker may presume that transactions should not be combined for Section 871(m) purposes unless they are over-the-counter transactions that are priced, marketed or sold in connection with each other. Under the general rule in the Regulations, a short party could have presumed that transactions that together generate the required dividend equivalent payments are not entered into in connection with each other if either (i) the long party holds the transaction in separate accounts and the short party does not have actual knowledge that the accounts were created separately to avoid Section 871(m), or (ii) the transactions were entered into two or more business days apart. IRS guidance provided a simplified standard for 2017 and 2018. The Notice extends application of the simplified standard to 2020.

Extension of Phase-Ins for QDDs

The Notice extends the same three QDD phase-ins that were pushed until 2019 by prior IRS guidance. Previous IRS guidance provided that a QDD:

  • Will not be subject to tax on dividends and dividend equivalents received in the QDD's equity derivatives dealer capacity until 2019;
  • Will be required to compute its Section 871(m) tax liability using a net delta approach beginning January 1, 2019; and
  • Pursuant to the 2017 QI Agreement, must perform certain periodic reviews with respect to its QDD activities but only beginning in 2019.

The Notice pushes each of these dates back to begin in 2021.

Extension of QSL Transition Rules

Notice 2010-46 contained an early IRS solution to potential overwithholding on a chain of dividends and dividend equivalents (i.e., where an intermediary is withheld upon and subsequently withholds on the same payment stream). The QSL regime provides for (1) an exception to withholding for payments to a QSL and (2) a framework to credit forward prior withholding on a chain of dividends and dividend equivalents. The QDD rules were meant to replace the QSL regime; however, IRS guidance provided that withholding agents may use the QSL rules for payments made in 2018 and 2019. The Notice provides that withholding agents can use the QSL rules for payments made in 2020 as well.

Looking Forward

Whispers have been in the wind for much of 2018 about a potential extension of the phase-in for the Section 871(m) regulations. Some in the tax community wondered whether non-delta-one transactions could become exempt from the Regulations completely. With extensions to 2021 across the board, and Treasury focused on implementing tax reform, Section 871(m) and its regulations may go on the back burner for the immediate future. The Notice states that taxpayers are permitted to rely on it until the Regulations and the 2017 QI Agreement are amended to reflect the extensions contained in the Notice.


1 Notice 2018-72 is available at https://www.irs.gov/pub/irs-drop/n-18-72.pdf.

2 All section references are to the Internal Revenue Code of 1986, as amended ("Code"), and the Treasury regulations promulgated thereunder.

3 For a more detailed discussion of the 2015 final regulations, see " IRS Releases Final & Temporary HIRE Act Regulations Addressing Section 871(m) Dividend Equivalents."

4 For a more detailed discussion of Notice 2016-76, see "Stress Relief: IRS Notice 2016-76 Eases the Implementation Rules for Cross-Border Dividend Equivalent Withholding."

5 For a more detailed discussion of the QDD rules, see "I Have Always Been Afraid of Banks: the IRS Revamps Cross-Border Dividend Equivalent Rules on President Obama's Last Day in Office."

6 See Treas. Reg. Section 1.871-15(a)(12). A "potential Section 871(m) transaction" is any securities-lending or sale-repurchase transaction, NPC or ELI that references one or more underlying securities.

7 The Notice and thus the grandfather for non-delta-one instruments does not apply to a "specified NPC," as described in Treas. Reg. section 1.871-15(d)(1).

8 Relevant considerations for the determination of good faith include whether a taxpayer or withholding agent made a good faith effort to (i) build or update its documentation and withholding systems to comply with the Section 871(m) regulations, (ii) determine whether transactions are combined, (iii) report information required under the Section 871(m) regulations and (iv) implement the substantial equivalence test. See Notice 2016-76.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions