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02 November 2015

ISDA Publishes 2015 Section 871(m) Protocol


The Protocol comes in response to changes in US tax laws, which will impose a 30% withholding tax on a variety of equity derivatives transactions that reference US equity securities.

Final regulations under Section 871(m) of the Internal Revenue Code were issued by the US Treasury and Internal Revenue Service on September 17, 2015, and will affect transactions entered into from January 1, 2016.

The Protocol enables market participants to amend their International Swaps and Derivatives Association, Inc. (ISDA) Master Agreements to allocate the withholding tax to the party that takes the long position.

ISDA has published two previous Protocols prior to the release of the final regulations that address the impact of Section 871(m): the ISDA 2010 HIRE Act Protocol and the ISDA 2010 Short Form HIRE Act Protocol. The latest Protocol preserves existing provisions under the 2010 Protocols for transactions entered into before January 1, 2017. The new Protocol provisions would apply from that date. The burden of withholding tax in all three Protocols is effectively the same.

Section 871(m) was enacted in 2010, and required dividend-equivalent payments on certain US total return products to be subject to a US withholding tax of up to 30% when the long party to the trade is a non-US person. The final regulations will require withholding, unless an exception applies, on all US equity derivatives with a delta of at least 0.8 for: (i) transactions entered into during 2016, but only with respect to payments made on or after January 1, 2018; and (ii) transactions entered into from January 1, 2017.

The Protocol is open for adherence for ISDA members and non-members from November 2, 2015.

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