Section 871(m)

On August 23, 2022, the IRS issued Notice 2022-37 extending, once again, the phase-in period for certain rules under Section 871(m), 1441, 1461 and 1473 of the Internal Revenue Code (the “Section 871(m) Regulations”).

Notice 2022-37 extends the transition relief which Notice 2020-02 provided for the years 2021 and 2022, and extends the deadlines for the implementation of the requirements under these regulations as follows:

• The introduction of the withholding on non-delta-one transactions was delayed to January 1, 2025. Also, the “good faith period” for delta-one transactions was extended to 2024 and for non-delta-one transactions to 2025. This means that until January 1, 2025, only delta-one instruments and contracts referencing U.S. underlyings will be in scope for Section 871(m).

• The IRS extended the simplified standard introduced with Notice 2016-76 to determine whether transactions are combined transactions to January 1, 2025. The IRS confirms that transactions that are combined under the simplified standard shall remain combined until all transactions that were combined under this rule were disposed.

• The IRS has extended the phase-in relief of several provisions applying to Qualified Derivatives Dealers (“QDD”) to January 1, 2025:

  1. QDDs shall determine their tax liability using the net delta exposure method until January 1, 2025.

  2. The IRS extended the tax exemption on dividends and dividend equivalents received by a QDD in its equity derivatives dealer capacity until January 1, 2025. However, the QDD shall remain liable for tax on dividends and dividend equivalents received in any capacity other than as equity derivatives dealer, and on any other U.S. source FDAP payment that it receives regardless of its capacity. Also, the QDD remains required to withhold on dividend equivalents paid to a non-U.S. person on a section 871(m) transaction.

  3. A Periodic Review with respect to a QDD’s QDD activities for 2017 until 2024 is not required. The IRS plans to incorporate a waiver of the QI periodic review requirement for QDDs, as well as other transitional provisions for the tax years 2023 and 2024 into the QI Agreement which enters into force starting January 1, 2023.

• Finally, the transition rules in notice 2010-46, which introduced the Qualified Securities Lender regime in the context of securities lending and sale repurchase agreements, were extended to January 1, 2025.