Proposed IRS Regulations Will Impose U.S. Withholding Tax on Dividend-Linked Amounts under Many Equity Swaps and Other Equity-Linked Transactions on U.S. Equities

Proposed IRS regulations that would impose U.S. withholding tax on “dividend equivalents” paid to a non-U.S. person under many equity swaps on U.S. equities were published on January 23, 2012.  The proposed regulations would also potentially apply to virtually all U.S.-equity-linked transactions that provide for any payment or adjustment that is determined by reference to actual dividends on a U.S. equity or index (other than certain broad-based indices), including futures, forwards, contracts for differences, options, structured notes, convertible bonds and mandatory convertible securities, and swaps and other derivatives on such instruments and on U.S. equities, including on preferred stock of U.S. corporations.  For transactions within the scope of the rules, withholding tax would be required to be withheld on payments made after the regulations are issued in final form (expected to be January 1, 2013), including on outstanding transactions.  The proposed regulations raise very significant compliance concerns both for non-U.S. taxpayers and for withholding agents.