New IRS Rules Seek to Curb Tax Avoidance on Foreign Investors' Dividends

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The government took fresh steps to curb the ability of foreign investors to skirt the withholding tax on dividends paid by U.S. companies, replacing 2012 guidance with regulations (REG-120282-10) setting out a new, more tailored test for tax avoidance transactions.
“When finalized, the proposed regulations will close a wasteful tax loophole that enables non-U.S. investors, like offshore hedge funds, with a way to avoid taxes on dividends paid by U.S. equities,” the Treasury Department said in unveiling the rules Dec. 4.
The guidance is intended to address concerns about transactions that use instruments such as securities loans, sale-repurchase transactions or specified notional principal contracts (NPCs) to avoid U.S. requirements that dividends paid from sources within the U.S. be subject to a 30 percent withholding tax.
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