Page 33 - Withholding Taxes for Foreign Entities

10:50 - 14-Feb-2020
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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
regulations for information on these special re- For transactions entered into before January each underlying security. The section 871(m)
quirements. 1, 2017, a SNPC is any NPC if: amount is described in Regulations section
• In connection with entering into the con- 1.871-15(q)(3).
Dividend Equivalents tract, any long party to the contract trans- For more information on amounts paid to
fers the underlying security to any short QDDs, see the Chapter 3 regulations issued
Dividend equivalent payments. Dividend party to the contract; with the section 871(m) regulations. You can
equivalent payments are treated as U.S. source • In connection with the termination of the view the regulations at IRS.gov/irb/
dividends such that withholding under Chap- contract, any short party to the contract 2017-09_IRB#TD-9815.
ter 3 may apply. Use Income Code 34 or 40 to transfers the underlying security to any
report dividend equivalent payments. Dividend long party to the contract; Gains
equivalent payments are withholdable pay- • The underlying security is not readily trade-
ments except when an exception applies for able on an established securities market; You generally do not need to withhold under
Chapter 4 purposes. or Chapter 3 or 4 on any gain from the sale of real
A dividend equivalent is a payment (as de- • In connection with entering into the con- or personal property because it is not FDAP in-
fined in Regulations section 1.871-15(c)) that, tract, the underlying security is posted as come. However, see U.S. Real Property Inter-
directly or indirectly, is contingent on, or deter- collateral by any short party to the contract est, later.
mined by reference to, the payment of a divi- with any long party to the contract.
dend from U.S. sources. Dividend equivalent For more information regarding dividend Capital gains (Income Code 9). You must
payments include the following payments. equivalents, see Regulations section 1.871-15 withhold at 30%, or if applicable, a reduced
1. A substitute dividend made under a secur- and Notice 2020-2. treaty rate, on the gross amount of the following
items.
ities lending or sale-repurchase transac- Amounts paid to qualified securities • Gains on the disposal of timber, coal, or
tion involving a U.S. stock. lenders (QSLs) For 2017, a withholding agent domestic iron ore with a retained economic
2. A payment that references the payment of that made payments of substitute dividends to a interest, unless an election is made to treat
a dividend from an underlying security QSL could treat the QSL as the recipient. Be- those gains as income effectively connec-
made under a specified notional principal ginning January 1, 2019, QSLs can no longer ted with a U.S. trade or business.
contract. be treated as the recipient, except that a QSL • Gains on contingent payments received
may be treated as a recipient for substitute divi-
3. A payment that references the payment of dend payments made before January 1, 2023. from the sale or exchange after October 4,
1966, of patents, copyrights, secret pro-
a dividend from an underlying security See Notice 2020-2. cesses and formulas, goodwill, trade-
made to a specified equity-linked instru- marks, trade brands, franchises, and other
ment. Amounts paid to QDDs. Only an eligible like property.
4. Any payment determined by regulations to entity that has entered into a QI agreement can • Gains on certain transfers of all substantial
be a QDD. An eligible entity is a home office or
be substantially similar to a payment in (1) branch that is a QI and that is: rights to, or an undivided interest in, pat-
or (2) above. ents if the transfers were made before Oc-
1. A dealer in equity derivatives that is sub- tober 5, 1966.
Substitute dividend (Income Code 34). ject to regulatory supervision as a dealer • Certain gains from the sale or exchange of
A substitute dividend is any payment made un- by a governmental authority in the jurisdic- original issue discount obligations issued
der a securities lending or sale-repurchase tion in which it was organized or operates; after March 31, 1972. For more on with-
transaction that (directly or indirectly) is contin- holding on original issue discount obliga-
gent upon, or determined by reference to, the 2. A bank or bank holding company that is tions, see Interest, earlier.
payment of a dividend from sources in the Uni- subject to regulatory supervision as a
ted States. bank or bank holding company (as appli- If you do not know the amount of the gain,
cable) by a governmental authority in the you must withhold an amount necessary to en-
Specified notional principal contracts jurisdiction in which it was organized or sure that the tax withheld will not be less than
(SNPCs) and specified equity-linked instru- operates; 30% of the recognized gain. The amount to be
ments (SELIs) (Income Code 40). withheld, however, must not be more than 30%
3. An entity that is wholly owned (directly or of the amount payable because of the transac-
Transactions entered into on or after Janu- indirectly) by a bank or bank holding com- tion.
ary 1, 2017. pany subject to regulatory supervision as Unless you have reason to believe other-
For transactions entered into on or after Jan- a bank or bank holding company (as appli- wise, you may rely upon the written statement
uary 1, 2017 (including as a result of a deemed cable) by a governmental authority in the of the person entitled to the income as to the
exchange pursuant to section 1001), a SNPC or jurisdiction in which the bank or bank hold- amount of gain. The Form W-8 or documentary
SELI is a notional principal contract (NPC) or ing company (as applicable) was organ- evidence must show the beneficial owner's ba-
equity linked instrument, respectively, with a ized or operates and that entity, in its ca- sis in the property giving rise to the gain.
delta of 0.8 or greater if it is a simple contract pacity as a dealer in equity derivatives:
under Regulations section 1.871-15(a)(14)(i), or a. Issues potential section 871(m) trans- Tax treaties. Many tax treaties exempt certain
it meets the substantial equivalence test if it is a actions to customers; and types of gains from U.S. income tax. Be sure to
complex contract under Regulations section carefully check the provision of the treaty that
1.871-15(a)(14)(ii). See Regulations section b. Receives dividends with respect to applies before allowing an exemption from with-
1.871-15(g) for the delta test and Regulations stock or dividend equivalent pay- holding.
section 1.871-15(h) for the substantial equiva- ments pursuant to potential section
lence test. 871(m) transactions that hedge po- Royalties
Notwithstanding the preceding paragraph, tential section 871(m) transactions
for transactions entered into prior to January 1, that it issued; In general, you must withhold tax under Chap-
2023, transition relief provides that, subject to 4. A foreign branch of a U.S. financial institu- ter 3 on the payment of royalties from sources
an anti-abuse rule, only delta-one transactions tion if the foreign branch would be descri- in the United States. However, certain types of
will be treated as SNPCs and SELIs. See bed in (1), (2), or (3) had it been a sepa- royalties are given reduced rates or exemptions
Notice 2020-2. rate entity; or under some tax treaties. Accordingly, these dif-
NPCs entered into before January 1, ferent types of royalties are treated as separate
2017. 5. Any person otherwise acceptable to the categories for withholding purposes. For Chap-
IRS. ter 4 purposes, royalties are nonfinancial pay-
A QDD is liable for tax under section 881 on ments and are therefore excluded as withholda-
its section 871(m) amount for each dividend on ble payments.

Publication 515 (2020) Page 31