IRS Proposes Withholding on ‘Dividend Equivalents' to Foreigners

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Taxes will be required to be withheld on any payments of “dividend equivalents” to nonresident aliens and foreign corporations as a way to crack down on certain tax avoidance practices, IRS says in temporary (T.D. 9572) and proposed (REG-120282-10) rules. IRS says the rules seek to address concerns about transactions that use instruments such as securities loans or sale-repurchase transactions to avoid U.S. requirements that dividends paid from sources within the United States be subject to a 30 percent withholding tax. The rules offer guidance on the definition of the term “specified notional principal contract” under new tax code Section 871(m), enacted by the Hiring Incentives to Restore Employment Act.