Extension of Phase-in Period for Section 871(m) Extension of Phase-in Period for Section 871(m)

The arduous journey of the section 871(m) regulations introduced by the IRS back in 2016 continues. After the Notice 2020-2 extended the phase-in period and related transition rules until 2022, a new Notice further postponing the implementation of the final section 871(m) regulations has arrived.

On 23 August 2022, the US Treasury and Internal Revenue Service (IRS) released an advance version of Notice 2022-37 (available for download here) providing amendments to the section 871(m) regulations to grant a two-year delay to the effective/applicability date of certain rules in those final regulations and extend the phase-in period.

Swiss financial institutions (SFI) can therefore continue to rely on the “good faith” implementation of Section 871(m) for another two years. In particular, this means that:

• Delta-one transactions continue to be in scope of Section 871(m); however, the “good faith” implementation approach is extended to transactions entered into on or before 31 December 2024;
• Non-delta-one transactions do not fall within the scope of Section 871(m) until 1 January 2025;
• The simplified standard to identify combined transactions is extended to transactions entered into on or before 31 December 2024.

Notice 2022-37 also provides that QDDs will not have any tax or withholding obligation on the dividend and dividend equivalent payments received in their capacity as an equity derivatives dealer on or before 31 December 2024. The Notice also confirms that QDDs are not required to perform a periodic review with respect to their QDD activities before 2025.

The Notice essentially postpones the more challenging application of Section 871(m) to non-delta-one transactions until 2025. SFI will also welcome that they can continue to rely on the simplified standard for identifying combined transactions until 2025. Nevertheless, SFI (especially those acting as QDD) should not rest idle, but use this time to re-evaluate their efforts to comply with Section 871(m) and ensure that they are compliant with the “good faith” standard and that this is properly documented.

SFI with QDD status will welcome that the issue of a potential cascading withholding tax has been further pushed back until 2025 and that they will not have to perform a periodic review of their QDD activities before 2025 at the earliest, i.e. the compliance with Section 871(m) is excluded from the QI periodic review for the current 3-year cycle.