TAX NEWS - January 2010

United States: withholding taxes on U.S.-source dividends paid to nonresidents

The Internal Revenue Service (IRS) Large and Mid-Size Business division issued an Industry Directive on 14 January 2010 to its field examination teams with guidance related to "total return swaps" (TRSs) used to avoid withholding taxes on U.S.-source dividends paid to nonresidents.

The directive further notes that the targeted transactions have been designated a "Tier 1" issue (i.e. of high strategic importance to the LMSB and significantly impacting one or more industries). The directive provides four examples of transaction situations in which taxpayers and withholding agents are claiming that the related payments are foreign source and are not subject to U.S. withholding tax or certain reporting requirements.

The directive includes two model informal document requests (IDRs) and each of the four specific fact patterns has its own accompanying IDR to assist teams in determining when the TRS should be respected in substance as a notional principle contract or recharacterized as such forms of economic benefit by the nonresident as, e.g., an agency agreement, repurchase agreement or lending transaction.