The IRS released Notice 2017-42 extending the transition period for applying certain parts of the Sec. 871(m) rules. Sec. 871(m) treats “dividend equivalent payments” arising on certain financial transactions that reference dividend-paying US equities as US-source dividends subject to withholding.
This extension continues the status quo for a number of provisions through 2018 and provides a one-year extension on many transition aspects.
The notice has been well-received by industry. Many financial institutions had been struggling with operationalizing the Sec. 871(m) regulatory regime and were requesting more time. This extension generally provides an additional year to reach various implementation milestones.
Some taxpayers remain hopeful that this delay is a signal of permanent status, in which non-delta-one transactions and the more complex aspects of the QDD regime will never be covered by the rules, absent anti-abuse provisions.
The government has not provided any indication that there is potential for this development, but the additional time for implementation certainly gives financial institutions ample opportunity to make their case and reassure the government that the current iteration of the rules is sufficient to achieve policy objectives.
The extension of the Sec. 871(m) regulatory transition includes the following key elements:
Notice 2017-42 also states that Treasury and the IRS continue to evaluate the administrative burdens present in the regulations and whether other changes might reduce unnecessary burdens.