The U.S. Internal Revenue Service has issued Notice 2018-72 providing further transitional relief for the application of the section 871(m) rules (that apply to dividend equivalent payments arising with respect to equity derivatives with U.S. equity underliers). The transitional guidance was expected by industry participants, but this notice provides an additional two-year delay on the application of certain 871(m) rules rather than the single-year extensions of the past.

Here are highlights of the relief provisions:

– Additional 2-year delay on application of 871(m) to non-delta one contracts; non-delta one products would not come into scope until 2021

– Simplified combined transaction rule (priced, marketed sold together) is extended also for 2 years

– Enforcement taking into account good faith efforts to comply now applies to delta-one contracts for years 2017 through 2020 and to non-delta one products in 2021

– QDD will continue to be exempt for both dividends and dividend equivalents received in its derivatives dealer capacity through 2020 (absent this relief, QDD’s were scheduled to be withholdable on actual dividends as of January 1, 2019)

– QDD starts applying net delta approach to determining QDD tax liability beginning in 2021 instead of 2019

– QDD obtains addition two-year relief on conducting periodic review of its QDD activities under the QI Agreement; this pushes QDD periodic review to 2021

– Qualified Securities Lender (QSL) regime is extended 2 years through 2020