Qualified Derivatives Dealers under Section 871(m)
Summary
SIFMA 1 provided commenets to the Department of the Treasury (DOT) and the Internal Revenue Service (IRS) to amend the regulations under Section 871(m) of the Internal Revenue Code of 1986 (the “Code”) to permanently preserve two aspects of the qualified derivatives dealer (“QDD”) transition relief currently provided in Notice 2024-44 and its predecessors (the “Transition Notices”).
Excerpt
First, the government asked whether we believe there is statutory authority for the final regulations to preserve the rule currently provided in the Transition Notices under which dividends on shares received by a QDD in its dealer capacity are not subject to tax under Sections 871 or 881, even if the QDD does not make a corresponding dividend equivalent payment to a foreign investor that is subject to tax under Section 871(m). In this regard, the government identified an example in which a QDD enters into one or more derivatives with foreign investors, each having a delta of, for example, 0.5, that in the aggregate cause the QDD to have a short delta-one position with respect to the reference shares. The QDD then hedges that position by acquiring and holding the reference shares. If the current rule under the Transition Notices were continued, no withholding tax would apply to the dividends received by the QDD, and no Section 871(m) withholding tax would apply with respect to amounts paid or deemed paid to the foreign investors.
Second, the government asked us to address whether we believe there is statutory authority for the final regulations to preserve the rule currently provided in the Transition Notices under which a QDD is not subject to tax under Sections 871 or Section 881 on dividends or dividend equivalents that it receives in a dealer capacity with respect to shares of a United States corporation, even if the QDD has a positive net delta with respect to such shares. In this regard, the government identified an example in which a QDD, as part of its dealer books, is short 99 shares of a reference equity and long 100 shares of the same reference equity and therefore has a net long position of one share of the reference equity. As discussed below, we believe that the government has statutory authority to continue both exemptions provided in the Transition Notices and to incorporate them into the final regulations.
In addition, because the existing transition rules under Notice 2024-44 are scheduled to expire on January 1, 2027, SIFMA respectfully requests that the Treasury Department and the IRS issue a notice as soon as practicable confirming that the transition relief provided in Notice 2024-44 will be extended until a date that is no earlier than 18 months after the publication in the Federal Register of permanent guidance (such as amendments to the final regulations), and in any event no earlier than January 1, 2029. Market participants need to
know well before January 1, 2027, what rules will apply so that they can make documentation, trading and hedging decisions and corresponding systems changes without disruption to the cross-border equity derivatives market.
- SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.