Dividend Equivalents From Sources Within the United States, 73079-73083 [2013-28933]

Download as PDF 73079 Rules and Regulations Federal Register Vol. 78, No. 234 Thursday, December 5, 2013 This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C. 1510. The Code of Federal Regulations is sold by the Superintendent of Documents. Prices of new books are listed in the first FEDERAL REGISTER issue of each week. DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [TD 9648] RIN 1545–BK53 Dividend Equivalents From Sources Within the United States Internal Revenue Service (IRS), Treasury. ACTION: Final regulations and removal of temporary regulations. AGENCY: This document contains final regulations relating to certain dividend equivalents for purposes of section 871(m) of the Internal Revenue Code (Code). The regulations provide guidance to nonresident alien individuals and foreign corporations that hold specified notional principal contracts providing for payments that are contingent upon or determined by reference to U.S. source dividend payments and to withholding agents. DATES: Effective Date: These regulations are effective on December 5, 2013. Applicability Date: For dates of applicability, see §§ 1.863–7(a)(2), 1.871–15(o), 1.881–2(e), 1.892–3(c), 1.894–1(e), 1.1441–2(f), 1.1441–3(h)(2), 1.1441–4(g)(1), 1.1441–6(i)(1), 1.1441– 7(a)(4) and (g), and 1.1461–1(c)(2)(iii). FOR FURTHER INFORMATION CONTACT: D. Peter Merkel or Karen Walny at (202) 317–6938 (not a toll-free number). SUPPLEMENTARY INFORMATION: SUMMARY: ehiers on DSK2VPTVN1PROD with RULES Background Congress enacted section 871(m) (originally designated as section 871(l)) on March 18, 2010, in section 541 of the Hiring Incentives to Restore Employment Act (HIRE Act), Public Law 111–147 (124 Stat. 71). Section 871(m) applies to any substitute dividend made pursuant to a VerDate Mar<15>2010 13:56 Dec 04, 2013 Jkt 232001 securities lending or a sale-repurchase transaction (repo) that is contingent upon, or determined by reference to, the payment of a U.S. source dividend, any payment made pursuant to a notional principal contract (NPC) that is a specified notional principal contract (specified NPC) when the payment is contingent upon, or determined by reference to, the payment of a U.S. source dividend, and any other payment determined by the Secretary to be substantially similar (dividend equivalent). Section 871(m) treats a dividend equivalent as a dividend from sources within the United States for purposes of sections 871(a), 881, and 4948(a), and chapters 3 and 4 of subtitle A of the Code. Section 871(m) generally applies to any dividend equivalent payment made on or after September 14, 2010. With respect to payments made on or after September 14, 2010, and on or before March 18, 2012, section 871(m)(3)(A) provides a factor-based test for determining whether an NPC is a specified NPC. With respect to payments made after March 18, 2012, section 871(m)(3)(B) provides that any NPC is a specified NPC unless the Secretary determines that the contract is of a type which does not have the potential for tax avoidance. On January 23, 2012, the Federal Register published temporary regulations (TD 9572) at 77 FR 3108 (2012 temporary regulations), and a notice of proposed rulemaking by crossreference to temporary regulations and notice of public hearing at 77 FR 3202 (2012 proposed regulations, and together with the 2012 temporary regulations, 2012 section 871(m) regulations) under section 871(m) of the Code. The 2012 section 871(m) regulations related to dividend equivalents from sources within the United States paid to nonresident alien individuals and foreign corporations. Corrections to the 2012 temporary regulations were published on February 6, 2012, and March 8, 2012, in the Federal Register at 77 FR 5700 and 77 FR 13969, respectively. A correcting amendment to the 2012 temporary regulations was also published on August 31, 2012, in the Federal Register at 77 FR 53141. The Treasury Department and the IRS received written comments on the 2012 section 871(m) regulations, which are available at www.regulations.gov. A PO 00000 Frm 00001 Fmt 4700 Sfmt 4700 public hearing was held on April 27, 2012. The majority of the comments related to the 2012 proposed regulations. Comments received regarding the provisions being finalized in this document are described in the Explanation of Provisions part of the preamble. An explanation of the other comments on the 2012 section 871(m) regulations is provided in the withdrawal of notice of proposed rulemaking, notice of proposed rulemaking and notice of public hearing on this subject in the Proposed Rules Section in this issue of the Federal Register. Explanation of Provisions Section 1.871–15(d)(1) of these final regulations adopts with minimal changes § 1.871–16T(b) of the 2012 temporary regulations, which incorporates the definition of a specified NPC provided in section 871(m)(3)(A). The four-factor specified NPC definition provided in § 1.871–16T(b) applies to payments made after March 18, 2012, and before January 1, 2014. These final regulations extend the applicability of the four-factor definition to payments made before January 1, 2016. Proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the Federal Register (the 2013 proposed regulations) contain the proposed definition of a specified NPC for payments made on or after January 1, 2016. The 2013 proposed regulations replace the 2012 proposed regulations, which provided a seven-factor approach to defining a specified NPC. Comments indicated that financial services providers would have difficulty modifying their systems to implement the 2012 proposed regulations under the timeline provided in the 2012 proposed regulations. The Treasury Department and the IRS believe that an extension of the statutory definition of the term specified NPC is necessary because the 2013 proposed regulations adopt a different approach from the 2012 proposed regulations for determining whether an NPC is a specified NPC. In addition, this extension will allow the financial services industry adequate time to establish necessary systems and other operating procedures to comply with the rules described in the 2013 proposed regulations. E:\FR\FM\05DER1.SGM 05DER1 ehiers on DSK2VPTVN1PROD with RULES 73080 Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Rules and Regulations The 2012 temporary regulations amended several regulations to clarify the application of section 871(m). For example, the 2012 temporary regulations modified § 1.863–7 to provide that the general source rule for NPCs did not apply to a dividend equivalent under section 871(m). The 2012 temporary regulations also provided that section 871(m) and § 1.871–16T applied to dividend equivalents received by foreign corporations. These final regulations adopt those temporary rules without change. These final regulations also amend certain regulations under section 1441 to require a withholding agent to withhold tax owed with respect to a dividend equivalent. Generally, these amendments are consistent with the amendments made in the 2012 temporary regulations. In addition, these final regulations reinstate to § 1.1441–7(a)(3) examples relating to the definition of a withholding agent, which were inadvertently deleted by the 2012 temporary regulations. One comment suggested that the regulations clarify that financial intermediaries and custodians are not parties to a section 871(m) transaction and should not be withholding agents with respect to a dividend equivalent payment. The Treasury Department and the IRS disagree and believe that a financial intermediary or custodian that satisfies the definition of a withholding agent provided in § 1.1441–7(a) should be considered a withholding agent for purposes of section 871(m). Another comment stated that § 1.1441–3T(i), which permitted a withholding agent to use the distributing corporation’s estimates to determine the amount of a dividend equivalent, was unduly harsh because the withholding agent remained liable for tax, interest, and penalties when the actual dividend exceeded the estimate. Section 1.1441–3T(i) is withdrawn and is not adopted in these final regulations. The Treasury Department and the IRS believe that withholding agents should comply with § 1.1441–3(d)(1) in the event that the amount of a dividend equivalent is uncertain. Other comments relating to the withholding provisions described the difficulties that withholding agents would encounter when administering the 2012 proposed regulations. The Treasury Department and the IRS believe that withdrawing the 2012 proposed regulations and publishing the 2013 proposed regulations addresses these comments. In addition, these regulations finalize portions of the 2012 proposed VerDate Mar<15>2010 13:56 Dec 04, 2013 Jkt 232001 regulations relating to the treatment of dividend equivalent payments for purposes of sections 892 and 894. Comments to the 2012 proposed regulations generally supported the proposed regulations under sections 892 and 894. These portions of the proposed regulations are finalized without change. The Treasury Department and the IRS will continue to closely scrutinize other transactions that are not covered by section 871(m) and that may be used to avoid U.S. taxation and U.S. withholding. In addition, the IRS may challenge the U.S. tax results claimed in connection with transactions that are designed to avoid the application of section 871(m) using all available statutory provisions and judicial doctrines (including the substance over form doctrine, the economic substance doctrine under section 7701(o), the step transaction doctrine, and tax ownership principles) as appropriate. For example, nothing in section 871(m) precludes the IRS from asserting that a contract labeled as an NPC is in fact an ownership interest in the equity referenced in the contract. Special Analyses It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations will primarily affect multinational financial institutions, which tend to be larger businesses, and foreign entities. Moreover the number of taxpayers affected and the average burden are minimal. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Drafting Information The principal authors of these regulations are D. Peter Merkel and Karen Walny of the Office of Associate Chief Counsel (International). Other personnel from the Treasury PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 Department and the IRS also participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1 is amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 is amended by revising the entry for § 1.863–7 and adding an entry for § 1.871–15 to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * § 1.863–7 also issued under 26 U.S.C. 863(a) and 871(m). * * * § 1.871–15 also issued under 26 U.S.C. 871(m). * * * Par. 2. Section 1.863–7 is amended by: ■ 1. Revising paragraph (a)(1). ■ 2. In paragraph (a)(2), revising the heading and adding a sentence at the end. The revisions and addition read as follows: ■ § 1.863–7 Allocation of income attributable to certain notional principal contracts under section 863(a). (a) Scope—(1) Introduction. This section provides rules relating to the source and, in certain cases, the character of notional principal contract income. However, this section does not apply to income from a section 988 transaction within the meaning of section 988 and the regulations thereunder, relating to the treatment of certain nonfunctional currency transactions. Further, this section does not apply to a dividend equivalent described in section 871(m) and the regulations thereunder. Notional principal contract income is income attributable to a notional principal contract as defined in § 1.446–3(c). An agreement between a taxpayer and a qualified business unit (as defined in section 989(a)) of the taxpayer, or among qualified business units of the same taxpayer, is not a notional principal contract, because a taxpayer cannot enter into a contract with itself. (2) Effective/applicability date. * * * With respect to a dividend equivalent described in section 871(m) and the regulations thereunder, this section applies to payments made on or after January 23, 2012. * * * * * § 1.863–7T ■ [Removed]. Par. 3. Section 1.863–7T is removed. E:\FR\FM\05DER1.SGM 05DER1 Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Rules and Regulations § 1.892–3 Par. 4. Section 1.871–15 is added as follows: ■ § 1.871–15 Treatment of dividend equivalents. (a) through (c) [Reserved]. (d) Specified NPCs—(1) Specified NPCs before January 1, 2016. For payments made after March 18, 2012, and before January 1, 2016, a specified NPC is any NPC if— (i) In connection with entering into the contract, any long party to the contract transfers the underlying security to any short party to the contract; (ii) In connection with the termination of the contract, any short party to the contract transfers the underlying security to any long party to the contract; (iii) The underlying security is not readily tradable on an established securities market; or (iv) In connection with entering into the contract, the underlying security is posted as collateral by any short party to the contract with any long party to the contract. (d)(2) through (n) [Reserved]. (o) Effective/applicability date. This section applies to payments made on or after January 23, 2012. § 1.871–15T ■ [Removed]. Par. 5. Section 1.871–15T is removed. § 1.871–16T [Removed]. Par. 6. Section 1.871–16T is removed. ■ Par. 7. Section 1.881–2 is amended by: ■ 1. Revising paragraph (b)(3). ■ 2. In paragraph (e), revising the heading and adding a sentence at the end. The revisions and addition read as follows: ■ § 1.881–2 Taxation of foreign corporations not engaged in U.S. business. ehiers on DSK2VPTVN1PROD with RULES * * * * * (b) * * * (3) Dividend Equivalents. For rules applicable to a foreign corporation’s receipt of a dividend equivalent, see section 871(m) and the regulations thereunder. * * * * * (e) Effective/applicability date. * * * Paragraph (b)(3) of this section applies to payments made on or after January 23, 2012. * * * § 1.881–2T [Removed]. Par. 8. Section 1.881–2T is removed. Par. 9. Section 1.892–3 is added to read as follows: ■ ■ VerDate Mar<15>2010 13:56 Dec 04, 2013 Jkt 232001 Income of foreign governments. (a)(1) through (a)(5) [Reserved]. For further information, see § 1.892–3T(a)(1) through (a)(5). (6) Dividend equivalents. Income from investments in stocks includes the payment of a dividend equivalent described in section 871(m) and the regulations thereunder. (b) [Reserved]. For further information, see § 1.892–3T(b). (c) Effective/applicability date. Paragraph (a)(6) of this section applies to payments made on or after December 5, 2013. ■ Par. 10. Section 1.894–1 is amended by: ■ 1. Redesignating paragraph (c) as (c)(1) and adding paragraph (c)(2). ■ 2. In paragraph (e): ■ a. Revising the heading, ■ b. Revising the third sentence, and ■ c. Adding a new fourth sentence. The addition and revisions read as follows: § 1.894–1 Income affected by treaty. * * * * * (c) * * * (2) Dividend equivalents. The provisions of an income tax convention relating to dividends paid to or derived by a foreign person apply to the payment of a dividend equivalent described in section 871(m) and the regulations thereunder. * * * * * (e) Effective/applicability date. * * * Paragraph (c)(1) of this section applies to payments made after November 13, 1997. Paragraph (c)(2) of this section applies to payments made on or after December 5, 2013. * * * ■ Par. 11. Section 1.1441–2 is amended by: ■ 1. Revising paragraph (b)(6). ■ 2. Adding a sentence to the end of paragraph (f). The revision and addition read as follows: § 1.1441–2 Amounts subject to withholding. * * * * * (b) * * * (6) Dividend equivalents. Amounts subject to withholding include a dividend equivalent described in section 871(m) and the regulations thereunder. For this purpose, the amount of a dividend equivalent includes any gross amount that is used in computing any net amount that is transferred to or from the taxpayer under the terms of the transaction or any other payment described in section 871(m) and the regulations thereunder. * * * * * PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 73081 (f) Effective/applicability date. * * * Paragraph (b)(6) of this section applies to payments made on or after January 23, 2012. § 1.1441–2T [Removed]. Par. 12. Section 1.1441–2T is removed. ■ Par. 13. Section 1.1441–3 is amended by: ■ 1. Revising paragraph (h). ■ 2. Removing paragraph (i). ■ 3. Redesignating paragraph (j) as newly-designated paragraph (i) and removing the language ‘‘paragraph (g)’’ from newly-redesignated paragraph (i) and adding ‘‘paragraphs (g) and (h)’’ in its place. The revisions read as follows: ■ § 1.1441–3 withheld. Determination of amounts to be * * * * * (h) Dividend equivalents—(1) Withholding on gross amount. The gross amount of a dividend equivalent described in section 871(m) and the regulations thereunder is subject to withholding in an amount equal to the gross amount of the dividend equivalent used in computing any net amount that is transferred to or from the taxpayer. (2) Effective/applicability date. This paragraph (h) applies to payments made on or after January 23, 2012. * * * * * § 1.1441–3T [Removed]. Par. 14. Section 1.1441–3T is removed. ■ Par. 15. Section 1.1441–4 is amended by: ■ 1. Revising paragraphs (a)(3)(i) and (iii). ■ 2. Revising the heading to paragraph (g). ■ 3. Removing the language ‘‘2000.’’ in paragraph (g)(1) and adding ‘‘2000, except that paragraph (a)(3)(iii) of this section applies to payments made on or after January 23, 2013.’’ in its place The revisions read as follows: ■ § 1.1441–4 Exemptions from withholding for certain effectively connected income and other amounts. (a) * * * (3) Income on notional principal contracts—(i) General rule. Except as otherwise provided in paragraph (a)(3)(iii) of this section, a withholding agent that pays amounts attributable to a notional principal contract described in § 1.863–7(a) or § 1.988–2(e) shall have no obligation to withhold on the amounts paid under the terms of the notional principal contract regardless of whether a withholding certificate is provided. However, a withholding agent E:\FR\FM\05DER1.SGM 05DER1 73082 Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Rules and Regulations must file returns under § 1.1461–1(b) and (c) reporting the income that it must treat as effectively connected with the conduct of a trade or business in the United States under the provisions of this paragraph (a)(3). Except as otherwise provided in paragraph (a)(3)(ii) of this section, a withholding agent must treat the income as effectively connected with the conduct of a U.S. trade or business if the income is paid to, or to the account of, a qualified business unit of a foreign person located in the United States or, if the payment is paid to, or to the account of, a qualified business unit of a foreign person located outside the United States, the withholding agent knows, or has reason to know, the payment is effectively connected with the conduct of a trade or business within the United States. Income on a notional principal contract does not include the amount characterized as interest under the provisions of § 1.446– 3(g)(4). * * * * * (iii) Exception for specified notional principal contracts. A withholding agent that makes a payment attributable to a specified notional principal contract described in section 871(m) and the regulations thereunder that is not treated as effectively connected with the conduct of a trade or business within the United States is obligated to withhold on the amount of the payment that is a dividend equivalent. * * * * * (g) Effective/applicability date—* * * * * * * * § 1.1441–4T [Removed]. Par. 16. Section 1.1441–4T is removed. ■ Par. 17. Section 1.1441–6 is amended by: ■ 1. Revising paragraph (c)(2). ■ 2. Redesignating paragraph (h) as paragraph (i) and revising newlyredesignated paragraph (i)(1). ■ 3. Adding a new paragraph (h). The revisions and addition read as follows: ■ § 1.1441–6 Claim of reduced withholding under an income tax treaty. ehiers on DSK2VPTVN1PROD with RULES * * * * * (c) * * * (2) Income to which special rules apply. The income to which paragraph (c)(1) of this section applies is dividends and interest from stocks and debt obligations that are actively traded, dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1), VerDate Mar<15>2010 13:56 Dec 04, 2013 Jkt 232001 dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the Securities and Exchange Commission under the Securities Act of 1933 (15 U.S.C. 77a), and amounts paid with respect to loans of securities described in this paragraph (c)(2). With respect to a dividend equivalent described in section 871(m) and the regulations thereunder, this paragraph (c)(2) applies to the extent that the underlying security described in section 871(m) and the regulations thereunder satisfies the requirements of this paragraph (c)(2). For purposes of this paragraph (c)(2), a stock or debt obligation is actively traded if it is actively traded within the meaning of section 1092(d) and § 1.1092(d)–1 when documentation is provided. * * * * * (h) Dividend equivalents. The rate of withholding on a dividend equivalent may be reduced to the extent provided under an income tax treaty in effect between the United States and a foreign country. For this purpose, a dividend equivalent as described in section 871(m) and the regulations thereunder is treated as a dividend from sources within the United States. To receive a reduced rate of withholding with respect to a dividend equivalent, a foreign person must satisfy the other requirements described in this section. (i) Effective/applicability dates—(1) General rule. This section applies to payments made after December 31, 2000, except that— (i) Paragraph (g) of this section applies to payments made after December 31, 2001, and (ii) Paragraph (h) of this section applies to payments made on or after December 5, 2013. * * * * * ■ Par. 18. Section 1.1441–7 is amended by: ■ 1. Removing paragraph (a)(3). ■ 2. Redesignating paragraph (a)(2) as paragraph (a)(3) and revising newlyredesignated paragraph (a)(3). ■ 3. Adding a new paragraph (a)(2). ■ 4. Adding a new paragraph (a)(4). ■ 5. Revising paragraph (g). The revisions and additions read as follows: § 1.1441–7 General provisions relating to withholding agents. (a) * * * (2) Withholding agent with respect to dividend equivalents. Each person that is a party to any contract or arrangement that provides for the payment of a dividend equivalent, as described in PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 section 871(m) and the regulations thereunder, is treated as having control and custody of the payment. (3) Examples. The following examples illustrate the rules of paragraphs (a)(1) and (a)(2) of this section: Example 1. USB is a broker organized in the United States. USB pays U.S. source dividends and interest, which are amounts subject to withholding under § 1.1441–2(a), to FC, a foreign corporation that has an investment account with USB. USB is a withholding agent as defined in paragraph (a)(1) of this section. Example 2. USB is a bank organized in the United States. FB is a bank organized in country X. FB has an omnibus account with USB through which FB invests in debt and equity instruments that pay amounts subject to withholding as defined in § 1.1441–2(a). FB is a nonqualified intermediary, as defined in § 1.1441–1(c)(14). Both USB and FB are withholding agents as defined in paragraph (a)(1) of this section. Example 3. The facts are the same as in Example 2, except that FB is a qualified intermediary. Both USB and FB are withholding agents as defined in paragraph (a)(1) of this section. Example 4. FB is a bank organized in country X. FB has a branch in the United States. FB’s branch has customers that are foreign persons who receive amounts subject to withholding, as defined in § 1.1441–2(a). FB is a withholding agent under paragraph (a)(1) of this section and is required to withhold and report payments of amounts subject to withholding in accordance with chapter 3 of the Internal Revenue Code. Example 5. X is a foreign corporation. X pays dividends to shareholders who are foreign persons. Under section 861(a)(2)(B), a portion of the dividends are from sources within the United States and constitute amounts subject to withholding within the meaning of § 1.1441–2(a). The dividends are not subject to tax under section 884(a). See section 884(e)(3). X is a withholding agent under paragraph (a)(1) of this section. Example 6. FC, a foreign corporation, enters into a notional principal contract (NPC) with Bank X, a bank organized in the United States. The NPC is a specified NPC for purposes of section 871(m) and the regulations thereunder. FC is the long party to the contract and Bank X is the short party. The NPC references a specified number of shares of dividend-paying common stock issued by a domestic corporation. As the long party, FC receives payments from Bank X based on any appreciation in the value of the common stock and dividends paid with respect to the common stock. As the short party, Bank X receives payment from FC based on any depreciation in the value of the common stock and a payment based on LIBOR. Bank X is a withholding agent because Bank X is deemed to have control and custody of a dividend equivalent as a party to the NPC. If FC’s tax liability under section 881 has not been satisfied in full by Bank X as withholding agent, FC is required to file a return on Form 1120–F (U.S. Income Tax Return of a Foreign Corporation). E:\FR\FM\05DER1.SGM 05DER1 Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / Rules and Regulations (4) Effective/applicability date. Paragraph (a)(2) of this section and Example 6 apply on or after January 23, 2012. * * * * * (g) Effective/applicability date. Except as otherwise provided in paragraphs (a)(4) and (f)(3) of this section, this section applies to payments made after December 31, 2000. § 1.1441–7T [Removed]. Par. 19. Section 1.1441–7T is removed. ■ Par. 20. Section 1.1461–1 is amended by: ■ 1. Revising paragraph (c)(2)(i)(L). ■ 2. Adding paragraph (c)(2)(iii). The revision and addition read as follows: ■ § 1.1461–1 withheld. Payment and returns of tax * * * * * (c) * * * (2) * * * (i) * * * (L) Dividend equivalents as described in section 871(m) and the regulations thereunder; * * * * * (iii) Effective/applicability date. Paragraph (c)(2)(i)(L) of this section applies on or after January 23, 2012. * * * * * § 1.1461–1T [Removed]. Par. 21. Section 1.1461–1T is removed. ■ John Dalrymple, Deputy Commissioner for Services and Enforcement. Approved: November 26, 2013. Mark J. Mazur, Assistant Secretary of the Treasury (Tax Policy). [FR Doc. 2013–28933 Filed 12–4–13; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF JUSTICE Bureau of Prisons 28 CFR Part 571 [BOP–1168–P] RIN 1120–AB68 ehiers on DSK2VPTVN1PROD with RULES Compassionate Release Bureau of Prisons, Justice. Interim rule. AGENCY: ACTION: The Bureau of Prisons (Bureau) changes its regulations on compassionate release, to provide that when considering an inmate for SUMMARY: VerDate Mar<15>2010 13:56 Dec 04, 2013 Jkt 232001 reduction in sentence, the General Counsel will solicit the opinion of the United States Attorney in the district in which the inmate was sentenced; and the final decision is subject to the general supervision and direction of the Attorney General and Deputy Attorney General. DATES: This rule will be effective December 5, 2013. Written comments must be postmarked and electronic comments must be submitted on or before February 3, 2014. Comments received by mail will be considered timely if they are postmarked on or before that date. The electronic Federal Docket Management System (FDMS) will accept comments until Midnight Eastern Time at the end of that day. ADDRESSES: To ensure proper handling of comments, please reference ‘‘Docket No. BOP 1168’’ on all electronic and written correspondence. The Department encourages all comments be submitted electronically through http:// www.regulations.gov using the electronic comment form provided on that site. An electronic copy of this document is also available at the http:// www.regulations.gov Web site for easy reference. Paper comments that duplicate the electronic submission are not necessary as all comments submitted to http://www.regulations.gov will be posted for public review and are part of the official docket record. Should you, however, wish to submit written comments via regular or express mail, they should be sent to Rules Unit, Office of General Counsel, Bureau of Prisons, 320 First Street NW., Washington, DC 20534. FOR FURTHER INFORMATION CONTACT: Sarah Qureshi, Office of General Counsel, Bureau of Prisons, phone (202) 307–2105. SUPPLEMENTARY INFORMATION: Posting of Public Comments Please note that all comments received are considered part of the public record and made available for public inspection online at www.regulations.gov. Such information includes personal identifying information (such as your name, address, etc.) voluntarily submitted by the commenter. If you want to submit personal identifying information (such as your name, address, etc.) as part of your comment, but do not want it to be posted online, you must include the phrase ‘‘PERSONAL IDENTIFYING INFORMATION’’ in the first paragraph of your comment. You must also locate all the personal identifying information you do not want posted online in the PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 73083 first paragraph of your comment and identify what information you want redacted. If you want to submit confidential business information as part of your comment but do not want it to be posted online, you must include the phrase ‘‘CONFIDENTIAL BUSINESS INFORMATION’’ in the first paragraph of your comment. You must also prominently identify confidential business information to be redacted within the comment. If a comment contains so much confidential business information that it cannot be effectively redacted, all or part of that comment may not be posted on www.regulations.gov. Personal identifying information identified and located as set forth above will be placed in the agency’s public docket file, but not posted online. Confidential business information identified and located as set forth above will not be placed in the public docket file. If you wish to inspect the agency’s public docket file in person by appointment, please see the FOR FURTHER INFORMATION CONTACT paragraph. The Bureau published a proposed rule revising all of the regulations in 28 CFR part 571, subpart G, on December 21, 2006 (71 FR 76619). We also published an interim rule making a technical change to the regulations on February 28, 2013 (78 FR 13478). We now withdraw the proposed rule published in 2006. The Bureau is continuing to consider issues relating to compassionate release and the public comments submitted in response to the 2006 notice of proposed rulemaking. At this time, we are promulgating this interim rule which makes the following changes to the regulations on compassionate release: (1) Providing that, when considering an inmate for reduction in sentence, the General Counsel will solicit the opinion of the United States Attorney in the district in which the inmate was sentenced; and (2) clarifying that the final decision is subject to the general supervision and direction of the Attorney General and Deputy Attorney General. Section 571.62 describes procedures the Bureau follows to review a request for reduction in sentence. The request must be reviewed by the Warden, General Counsel, Medical Director (for medical referrals), the Assistant Director (for non-medical referrals), and the Director. During the course of this review, the United States Attorney’s Office is consulted and made aware of a request being considered for approval. SUPPLEMENTARY INFORMATION: E:\FR\FM\05DER1.SGM 05DER1

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[Federal Register Volume 78, Number 234 (Thursday, December 5, 2013)]
[Rules and Regulations]
[Pages 73079-73083]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28933]



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Rules and Regulations
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Federal Register / Vol. 78, No. 234 / Thursday, December 5, 2013 / 
Rules and Regulations

[[Page 73079]]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9648]
RIN 1545-BK53


Dividend Equivalents From Sources Within the United States

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to certain 
dividend equivalents for purposes of section 871(m) of the Internal 
Revenue Code (Code). The regulations provide guidance to nonresident 
alien individuals and foreign corporations that hold specified notional 
principal contracts providing for payments that are contingent upon or 
determined by reference to U.S. source dividend payments and to 
withholding agents.

DATES: Effective Date: These regulations are effective on December 5, 
2013.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.863-7(a)(2), 1.871-15(o), 1.881-2(e), 1.892-3(c), 1.894-1(e), 1.1441-
2(f), 1.1441-3(h)(2), 1.1441-4(g)(1), 1.1441-6(i)(1), 1.1441-7(a)(4) 
and (g), and 1.1461-1(c)(2)(iii).

FOR FURTHER INFORMATION CONTACT: D. Peter Merkel or Karen Walny at 
(202) 317-6938 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    Congress enacted section 871(m) (originally designated as section 
871(l)) on March 18, 2010, in section 541 of the Hiring Incentives to 
Restore Employment Act (HIRE Act), Public Law 111-147 (124 Stat. 71).
    Section 871(m) applies to any substitute dividend made pursuant to 
a securities lending or a sale-repurchase transaction (repo) that is 
contingent upon, or determined by reference to, the payment of a U.S. 
source dividend, any payment made pursuant to a notional principal 
contract (NPC) that is a specified notional principal contract 
(specified NPC) when the payment is contingent upon, or determined by 
reference to, the payment of a U.S. source dividend, and any other 
payment determined by the Secretary to be substantially similar 
(dividend equivalent). Section 871(m) treats a dividend equivalent as a 
dividend from sources within the United States for purposes of sections 
871(a), 881, and 4948(a), and chapters 3 and 4 of subtitle A of the 
Code. Section 871(m) generally applies to any dividend equivalent 
payment made on or after September 14, 2010. With respect to payments 
made on or after September 14, 2010, and on or before March 18, 2012, 
section 871(m)(3)(A) provides a factor-based test for determining 
whether an NPC is a specified NPC. With respect to payments made after 
March 18, 2012, section 871(m)(3)(B) provides that any NPC is a 
specified NPC unless the Secretary determines that the contract is of a 
type which does not have the potential for tax avoidance.
    On January 23, 2012, the Federal Register published temporary 
regulations (TD 9572) at 77 FR 3108 (2012 temporary regulations), and a 
notice of proposed rulemaking by cross-reference to temporary 
regulations and notice of public hearing at 77 FR 3202 (2012 proposed 
regulations, and together with the 2012 temporary regulations, 2012 
section 871(m) regulations) under section 871(m) of the Code. The 2012 
section 871(m) regulations related to dividend equivalents from sources 
within the United States paid to nonresident alien individuals and 
foreign corporations. Corrections to the 2012 temporary regulations 
were published on February 6, 2012, and March 8, 2012, in the Federal 
Register at 77 FR 5700 and 77 FR 13969, respectively. A correcting 
amendment to the 2012 temporary regulations was also published on 
August 31, 2012, in the Federal Register at 77 FR 53141.
    The Treasury Department and the IRS received written comments on 
the 2012 section 871(m) regulations, which are available at 
www.regulations.gov. A public hearing was held on April 27, 2012. The 
majority of the comments related to the 2012 proposed regulations. 
Comments received regarding the provisions being finalized in this 
document are described in the Explanation of Provisions part of the 
preamble. An explanation of the other comments on the 2012 section 
871(m) regulations is provided in the withdrawal of notice of proposed 
rulemaking, notice of proposed rulemaking and notice of public hearing 
on this subject in the Proposed Rules Section in this issue of the 
Federal Register.

Explanation of Provisions

    Section 1.871-15(d)(1) of these final regulations adopts with 
minimal changes Sec.  1.871-16T(b) of the 2012 temporary regulations, 
which incorporates the definition of a specified NPC provided in 
section 871(m)(3)(A). The four-factor specified NPC definition provided 
in Sec.  1.871-16T(b) applies to payments made after March 18, 2012, 
and before January 1, 2014. These final regulations extend the 
applicability of the four-factor definition to payments made before 
January 1, 2016. Proposed regulations set forth in the notice of 
proposed rulemaking on this subject in the Proposed Rules section in 
this issue of the Federal Register (the 2013 proposed regulations) 
contain the proposed definition of a specified NPC for payments made on 
or after January 1, 2016. The 2013 proposed regulations replace the 
2012 proposed regulations, which provided a seven-factor approach to 
defining a specified NPC. Comments indicated that financial services 
providers would have difficulty modifying their systems to implement 
the 2012 proposed regulations under the timeline provided in the 2012 
proposed regulations. The Treasury Department and the IRS believe that 
an extension of the statutory definition of the term specified NPC is 
necessary because the 2013 proposed regulations adopt a different 
approach from the 2012 proposed regulations for determining whether an 
NPC is a specified NPC. In addition, this extension will allow the 
financial services industry adequate time to establish necessary 
systems and other operating procedures to comply with the rules 
described in the 2013 proposed regulations.

[[Page 73080]]

    The 2012 temporary regulations amended several regulations to 
clarify the application of section 871(m). For example, the 2012 
temporary regulations modified Sec.  1.863-7 to provide that the 
general source rule for NPCs did not apply to a dividend equivalent 
under section 871(m). The 2012 temporary regulations also provided that 
section 871(m) and Sec.  1.871-16T applied to dividend equivalents 
received by foreign corporations. These final regulations adopt those 
temporary rules without change.
    These final regulations also amend certain regulations under 
section 1441 to require a withholding agent to withhold tax owed with 
respect to a dividend equivalent. Generally, these amendments are 
consistent with the amendments made in the 2012 temporary regulations. 
In addition, these final regulations reinstate to Sec.  1.1441-7(a)(3) 
examples relating to the definition of a withholding agent, which were 
inadvertently deleted by the 2012 temporary regulations.
    One comment suggested that the regulations clarify that financial 
intermediaries and custodians are not parties to a section 871(m) 
transaction and should not be withholding agents with respect to a 
dividend equivalent payment. The Treasury Department and the IRS 
disagree and believe that a financial intermediary or custodian that 
satisfies the definition of a withholding agent provided in Sec.  
1.1441-7(a) should be considered a withholding agent for purposes of 
section 871(m).
    Another comment stated that Sec.  1.1441-3T(i), which permitted a 
withholding agent to use the distributing corporation's estimates to 
determine the amount of a dividend equivalent, was unduly harsh because 
the withholding agent remained liable for tax, interest, and penalties 
when the actual dividend exceeded the estimate. Section 1.1441-3T(i) is 
withdrawn and is not adopted in these final regulations. The Treasury 
Department and the IRS believe that withholding agents should comply 
with Sec.  1.1441-3(d)(1) in the event that the amount of a dividend 
equivalent is uncertain.
    Other comments relating to the withholding provisions described the 
difficulties that withholding agents would encounter when administering 
the 2012 proposed regulations. The Treasury Department and the IRS 
believe that withdrawing the 2012 proposed regulations and publishing 
the 2013 proposed regulations addresses these comments.
    In addition, these regulations finalize portions of the 2012 
proposed regulations relating to the treatment of dividend equivalent 
payments for purposes of sections 892 and 894. Comments to the 2012 
proposed regulations generally supported the proposed regulations under 
sections 892 and 894. These portions of the proposed regulations are 
finalized without change.
    The Treasury Department and the IRS will continue to closely 
scrutinize other transactions that are not covered by section 871(m) 
and that may be used to avoid U.S. taxation and U.S. withholding. In 
addition, the IRS may challenge the U.S. tax results claimed in 
connection with transactions that are designed to avoid the application 
of section 871(m) using all available statutory provisions and judicial 
doctrines (including the substance over form doctrine, the economic 
substance doctrine under section 7701(o), the step transaction 
doctrine, and tax ownership principles) as appropriate. For example, 
nothing in section 871(m) precludes the IRS from asserting that a 
contract labeled as an NPC is in fact an ownership interest in the 
equity referenced in the contract.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations. It is hereby certified that these 
regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that these regulations will primarily affect multinational 
financial institutions, which tend to be larger businesses, and foreign 
entities. Moreover the number of taxpayers affected and the average 
burden are minimal. Therefore, a Regulatory Flexibility Analysis is not 
required. Pursuant to section 7805(f) of the Code, the notice of 
proposed rulemaking preceding this regulation was submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal authors of these regulations are D. Peter Merkel and 
Karen Walny of the Office of Associate Chief Counsel (International). 
Other personnel from the Treasury Department and the IRS also 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by revising 
the entry for Sec.  1.863-7 and adding an entry for Sec.  1.871-15 to 
read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Sec.  1.863-7 also issued under 26 U.S.C. 863(a) and 871(m). * * 
* Sec.  1.871-15 also issued under 26 U.S.C. 871(m). * * *


0
Par. 2. Section 1.863-7 is amended by:
0
1. Revising paragraph (a)(1).
0
2. In paragraph (a)(2), revising the heading and adding a sentence at 
the end.
    The revisions and addition read as follows:


Sec.  1.863-7  Allocation of income attributable to certain notional 
principal contracts under section 863(a).

    (a) Scope--(1) Introduction. This section provides rules relating 
to the source and, in certain cases, the character of notional 
principal contract income. However, this section does not apply to 
income from a section 988 transaction within the meaning of section 988 
and the regulations thereunder, relating to the treatment of certain 
nonfunctional currency transactions. Further, this section does not 
apply to a dividend equivalent described in section 871(m) and the 
regulations thereunder. Notional principal contract income is income 
attributable to a notional principal contract as defined in Sec.  
1.446-3(c). An agreement between a taxpayer and a qualified business 
unit (as defined in section 989(a)) of the taxpayer, or among qualified 
business units of the same taxpayer, is not a notional principal 
contract, because a taxpayer cannot enter into a contract with itself.
    (2) Effective/applicability date. * * * With respect to a dividend 
equivalent described in section 871(m) and the regulations thereunder, 
this section applies to payments made on or after January 23, 2012.
* * * * *


Sec.  1.863-7T  [Removed].

0
Par. 3. Section 1.863-7T is removed.

[[Page 73081]]


0
Par. 4. Section 1.871-15 is added as follows:


Sec.  1.871-15  Treatment of dividend equivalents.

    (a) through (c) [Reserved].
    (d) Specified NPCs--(1) Specified NPCs before January 1, 2016. For 
payments made after March 18, 2012, and before January 1, 2016, a 
specified NPC is any NPC if--
    (i) In connection with entering into the contract, any long party 
to the contract transfers the underlying security to any short party to 
the contract;
    (ii) In connection with the termination of the contract, any short 
party to the contract transfers the underlying security to any long 
party to the contract;
    (iii) The underlying security is not readily tradable on an 
established securities market; or
    (iv) In connection with entering into the contract, the underlying 
security is posted as collateral by any short party to the contract 
with any long party to the contract.
    (d)(2) through (n) [Reserved].
    (o) Effective/applicability date. This section applies to payments 
made on or after January 23, 2012.


Sec.  1.871-15T  [Removed].

0
Par. 5. Section 1.871-15T is removed.


Sec.  1.871-16T  [Removed].

0
Par. 6. Section 1.871-16T is removed.

0
Par. 7. Section 1.881-2 is amended by:
0
1. Revising paragraph (b)(3).
0
2. In paragraph (e), revising the heading and adding a sentence at the 
end.
    The revisions and addition read as follows:


Sec.  1.881-2  Taxation of foreign corporations not engaged in U.S. 
business.

* * * * *
    (b) * * *
    (3) Dividend Equivalents. For rules applicable to a foreign 
corporation's receipt of a dividend equivalent, see section 871(m) and 
the regulations thereunder.
* * * * *
    (e) Effective/applicability date. * * * Paragraph (b)(3) of this 
section applies to payments made on or after January 23, 2012. * * *


Sec.  1.881-2T  [Removed].

0
Par. 8. Section 1.881-2T is removed.
0
Par. 9. Section 1.892-3 is added to read as follows:


Sec.  1.892-3  Income of foreign governments.

    (a)(1) through (a)(5) [Reserved]. For further information, see 
Sec.  1.892-3T(a)(1) through (a)(5).
    (6) Dividend equivalents. Income from investments in stocks 
includes the payment of a dividend equivalent described in section 
871(m) and the regulations thereunder.
    (b) [Reserved]. For further information, see Sec.  1.892-3T(b).
    (c) Effective/applicability date. Paragraph (a)(6) of this section 
applies to payments made on or after December 5, 2013.

0
Par. 10. Section 1.894-1 is amended by:
0
1. Redesignating paragraph (c) as (c)(1) and adding paragraph (c)(2).
0
2. In paragraph (e):
0
a. Revising the heading,
0
b. Revising the third sentence, and
0
c. Adding a new fourth sentence.
    The addition and revisions read as follows:


Sec.  1.894-1  Income affected by treaty.

* * * * *
    (c) * * *
    (2) Dividend equivalents. The provisions of an income tax 
convention relating to dividends paid to or derived by a foreign person 
apply to the payment of a dividend equivalent described in section 
871(m) and the regulations thereunder.
* * * * *
    (e) Effective/applicability date. * * * Paragraph (c)(1) of this 
section applies to payments made after November 13, 1997. Paragraph 
(c)(2) of this section applies to payments made on or after December 5, 
2013. * * *

0
Par. 11. Section 1.1441-2 is amended by:
0
1. Revising paragraph (b)(6).
0
2. Adding a sentence to the end of paragraph (f).
    The revision and addition read as follows:


Sec.  1.1441-2  Amounts subject to withholding.

* * * * *
    (b) * * *
    (6) Dividend equivalents. Amounts subject to withholding include a 
dividend equivalent described in section 871(m) and the regulations 
thereunder. For this purpose, the amount of a dividend equivalent 
includes any gross amount that is used in computing any net amount that 
is transferred to or from the taxpayer under the terms of the 
transaction or any other payment described in section 871(m) and the 
regulations thereunder.
* * * * *
    (f) Effective/applicability date. * * * Paragraph (b)(6) of this 
section applies to payments made on or after January 23, 2012.


Sec.  1.1441-2T  [Removed].

0
Par. 12. Section 1.1441-2T is removed.
0
Par. 13. Section 1.1441-3 is amended by:
0
1. Revising paragraph (h).
0
2. Removing paragraph (i).
0
3. Redesignating paragraph (j) as newly-designated paragraph (i) and 
removing the language ``paragraph (g)'' from newly-redesignated 
paragraph (i) and adding ``paragraphs (g) and (h)'' in its place.
    The revisions read as follows:


Sec.  1.1441-3  Determination of amounts to be withheld.

* * * * *
    (h) Dividend equivalents--(1) Withholding on gross amount. The 
gross amount of a dividend equivalent described in section 871(m) and 
the regulations thereunder is subject to withholding in an amount equal 
to the gross amount of the dividend equivalent used in computing any 
net amount that is transferred to or from the taxpayer.
    (2) Effective/applicability date. This paragraph (h) applies to 
payments made on or after January 23, 2012.
* * * * *


Sec.  1.1441-3T  [Removed].

0
Par. 14. Section 1.1441-3T is removed.
0
Par. 15. Section 1.1441-4 is amended by:
0
1. Revising paragraphs (a)(3)(i) and (iii).
0
2. Revising the heading to paragraph (g).
0
3. Removing the language ``2000.'' in paragraph (g)(1) and adding 
``2000, except that paragraph (a)(3)(iii) of this section applies to 
payments made on or after January 23, 2013.'' in its place
    The revisions read as follows:


Sec.  1.1441-4  Exemptions from withholding for certain effectively 
connected income and other amounts.

    (a) * * *
    (3) Income on notional principal contracts--(i) General rule. 
Except as otherwise provided in paragraph (a)(3)(iii) of this section, 
a withholding agent that pays amounts attributable to a notional 
principal contract described in Sec.  1.863-7(a) or Sec.  1.988-2(e) 
shall have no obligation to withhold on the amounts paid under the 
terms of the notional principal contract regardless of whether a 
withholding certificate is provided. However, a withholding agent

[[Page 73082]]

must file returns under Sec.  1.1461-1(b) and (c) reporting the income 
that it must treat as effectively connected with the conduct of a trade 
or business in the United States under the provisions of this paragraph 
(a)(3). Except as otherwise provided in paragraph (a)(3)(ii) of this 
section, a withholding agent must treat the income as effectively 
connected with the conduct of a U.S. trade or business if the income is 
paid to, or to the account of, a qualified business unit of a foreign 
person located in the United States or, if the payment is paid to, or 
to the account of, a qualified business unit of a foreign person 
located outside the United States, the withholding agent knows, or has 
reason to know, the payment is effectively connected with the conduct 
of a trade or business within the United States. Income on a notional 
principal contract does not include the amount characterized as 
interest under the provisions of Sec.  1.446-3(g)(4).
* * * * *
    (iii) Exception for specified notional principal contracts. A 
withholding agent that makes a payment attributable to a specified 
notional principal contract described in section 871(m) and the 
regulations thereunder that is not treated as effectively connected 
with the conduct of a trade or business within the United States is 
obligated to withhold on the amount of the payment that is a dividend 
equivalent.
* * * * *
    (g) Effective/applicability date--* * *
* * * * *


Sec.  1.1441-4T  [Removed].

0
Par. 16. Section 1.1441-4T is removed.
0
Par. 17. Section 1.1441-6 is amended by:
0
1. Revising paragraph (c)(2).
0
2. Redesignating paragraph (h) as paragraph (i) and revising newly-
redesignated paragraph (i)(1).
0
3. Adding a new paragraph (h).
    The revisions and addition read as follows:


Sec.  1.1441-6  Claim of reduced withholding under an income tax 
treaty.

* * * * *
    (c) * * *
    (2) Income to which special rules apply. The income to which 
paragraph (c)(1) of this section applies is dividends and interest from 
stocks and debt obligations that are actively traded, dividends from 
any redeemable security issued by an investment company registered 
under the Investment Company Act of 1940 (15 U.S.C. 80a-1), dividends, 
interest, or royalties from units of beneficial interest in a unit 
investment trust that are (or were upon issuance) publicly offered and 
are registered with the Securities and Exchange Commission under the 
Securities Act of 1933 (15 U.S.C. 77a), and amounts paid with respect 
to loans of securities described in this paragraph (c)(2). With respect 
to a dividend equivalent described in section 871(m) and the 
regulations thereunder, this paragraph (c)(2) applies to the extent 
that the underlying security described in section 871(m) and the 
regulations thereunder satisfies the requirements of this paragraph 
(c)(2). For purposes of this paragraph (c)(2), a stock or debt 
obligation is actively traded if it is actively traded within the 
meaning of section 1092(d) and Sec.  1.1092(d)-1 when documentation is 
provided.
* * * * *
    (h) Dividend equivalents. The rate of withholding on a dividend 
equivalent may be reduced to the extent provided under an income tax 
treaty in effect between the United States and a foreign country. For 
this purpose, a dividend equivalent as described in section 871(m) and 
the regulations thereunder is treated as a dividend from sources within 
the United States. To receive a reduced rate of withholding with 
respect to a dividend equivalent, a foreign person must satisfy the 
other requirements described in this section.
    (i) Effective/applicability dates--(1) General rule. This section 
applies to payments made after December 31, 2000, except that--
    (i) Paragraph (g) of this section applies to payments made after 
December 31, 2001, and
    (ii) Paragraph (h) of this section applies to payments made on or 
after December 5, 2013.
* * * * *

0
Par. 18. Section 1.1441-7 is amended by:
0
1. Removing paragraph (a)(3).
0
2. Redesignating paragraph (a)(2) as paragraph (a)(3) and revising 
newly-redesignated paragraph (a)(3).
0
3. Adding a new paragraph (a)(2).
0
4. Adding a new paragraph (a)(4).
0
5. Revising paragraph (g).
    The revisions and additions read as follows:


Sec.  1.1441-7  General provisions relating to withholding agents.

    (a) * * *
    (2) Withholding agent with respect to dividend equivalents. Each 
person that is a party to any contract or arrangement that provides for 
the payment of a dividend equivalent, as described in section 871(m) 
and the regulations thereunder, is treated as having control and 
custody of the payment.
    (3) Examples. The following examples illustrate the rules of 
paragraphs (a)(1) and (a)(2) of this section:

    Example 1. USB is a broker organized in the United States. USB 
pays U.S. source dividends and interest, which are amounts subject 
to withholding under Sec.  1.1441-2(a), to FC, a foreign corporation 
that has an investment account with USB. USB is a withholding agent 
as defined in paragraph (a)(1) of this section.
    Example 2. USB is a bank organized in the United States. FB is a 
bank organized in country X. FB has an omnibus account with USB 
through which FB invests in debt and equity instruments that pay 
amounts subject to withholding as defined in Sec.  1.1441-2(a). FB 
is a nonqualified intermediary, as defined in Sec.  1.1441-1(c)(14). 
Both USB and FB are withholding agents as defined in paragraph 
(a)(1) of this section.
    Example 3. The facts are the same as in Example 2, except that 
FB is a qualified intermediary. Both USB and FB are withholding 
agents as defined in paragraph (a)(1) of this section.
    Example 4. FB is a bank organized in country X. FB has a branch 
in the United States. FB's branch has customers that are foreign 
persons who receive amounts subject to withholding, as defined in 
Sec.  1.1441-2(a). FB is a withholding agent under paragraph (a)(1) 
of this section and is required to withhold and report payments of 
amounts subject to withholding in accordance with chapter 3 of the 
Internal Revenue Code.
    Example 5. X is a foreign corporation. X pays dividends to 
shareholders who are foreign persons. Under section 861(a)(2)(B), a 
portion of the dividends are from sources within the United States 
and constitute amounts subject to withholding within the meaning of 
Sec.  1.1441-2(a). The dividends are not subject to tax under 
section 884(a). See section 884(e)(3). X is a withholding agent 
under paragraph (a)(1) of this section.
    Example 6. FC, a foreign corporation, enters into a notional 
principal contract (NPC) with Bank X, a bank organized in the United 
States. The NPC is a specified NPC for purposes of section 871(m) 
and the regulations thereunder. FC is the long party to the contract 
and Bank X is the short party. The NPC references a specified number 
of shares of dividend-paying common stock issued by a domestic 
corporation. As the long party, FC receives payments from Bank X 
based on any appreciation in the value of the common stock and 
dividends paid with respect to the common stock. As the short party, 
Bank X receives payment from FC based on any depreciation in the 
value of the common stock and a payment based on LIBOR. Bank X is a 
withholding agent because Bank X is deemed to have control and 
custody of a dividend equivalent as a party to the NPC. If FC's tax 
liability under section 881 has not been satisfied in full by Bank X 
as withholding agent, FC is required to file a return on Form 1120-F 
(U.S. Income Tax Return of a Foreign Corporation).


[[Page 73083]]


    (4) Effective/applicability date. Paragraph (a)(2) of this section 
and Example 6 apply on or after January 23, 2012.
* * * * *
    (g) Effective/applicability date. Except as otherwise provided in 
paragraphs (a)(4) and (f)(3) of this section, this section applies to 
payments made after December 31, 2000.


Sec.  1.1441-7T  [Removed].

0
Par. 19. Section 1.1441-7T is removed.
0
Par. 20. Section 1.1461-1 is amended by:

0
1. Revising paragraph (c)(2)(i)(L).
0
2. Adding paragraph (c)(2)(iii).
    The revision and addition read as follows:


Sec.  1.1461-1  Payment and returns of tax withheld.

* * * * *
    (c) * * *
    (2) * * *
    (i) * * *
    (L) Dividend equivalents as described in section 871(m) and the 
regulations thereunder;
* * * * *
    (iii) Effective/applicability date. Paragraph (c)(2)(i)(L) of this 
section applies on or after January 23, 2012.
* * * * *


Sec.  1.1461-1T  [Removed].

0
Par. 21. Section 1.1461-1T is removed.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: November 26, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-28933 Filed 12-4-13; 8:45 am]
BILLING CODE 4830-01-P