On December 16, 2019, the Internal Revenue Service (the "IRS") released Notice 2020-2 (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 U.S. source dividends that are subject to withholding tax if paid to a non-U.S. 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 (the "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; IRS Notice 2017-42 providing a similar phase-in of the Regulations and related provisions, published in August 2017; and IRS Notice 2018-72 also providing a similar phase-in of the Regulations and related provisions, published in October 2018. 5 The Notice is a near mirror image of Notice 2018-72, again providing 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 derivative dealer ("QDD") reporting, 6 and (4) the transition out of the qualified securities lender (the "QSL") regime. Each of these extensions is discussed in more detail below.
In addition to the Notice, the IRS also released a small set of regulations finalizing some temporary regulations under Section 871(m). 7 Those final regulations do not make significant changes.
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) transactions8 that were not delta-one and that were entered into before January 1, 2021. The Notice extends this relief for non-delta-one transactions to cover transactions entered into before January 1, 2023. 9 This additional two-year extension is welcome to the structured products market, since a majority of structured products are non-delta-one transactions.
The Regulations still apply to...