On December 16, the IRS issued Notice 2020-2, which extends the phase-in of withholding under section 871(m). This is the latest in a series of such extensions.
Most importantly, under the notice, withholding on dividend equivalents applies only to delta-one transactions through 2022, and applies to other U.S. equity transactions beginning after 2022. A delta-one transaction tracks the underlying on a dollar-for-dollar basis.
In addition, the notice generally provides that:
A qualified derivatives dealer (QDD) (1) will not be subject to tax on dividends and dividend equivalents received in its equity derivatives dealer capacity until 2023; (2) will be required to compute its section 871(m) tax liability using a net delta approach beginning in 2023; and (3) will be required to perform certain periodic reviews with respect to its QDD activities beginning in 2023. Withholding agents can continue to use the qualified securities lending (QSL) rules for payments made until 2023.
A copy of Notice 2020-2 can be found here. For a comprehensive discussion of section 871(m), see our Clients & Friends Memo.
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