Newly issued temporary and proposed regulations indicate when U.S. withholding tax will be required in the case of “dividend-equivalent payments” made to non-U.S. persons under swap contracts on U.S. equities.

Under the HIRE Act, dividend-equivalent payments (that is, payments that are contingent upon or determined by reference to dividends paid on a U.S. equity) made after September 14, 2010, and before March 19, 2012, are subject to U.S. withholding tax only if the swap involves any of the following (and is therefore a “specified swap”):

• In connection with entering into the swap, the long party (defined as the party entitled to receive any dividend-equivalent payment under the swap) transfers the underlying security to the short party.
• Upon termination of the swap, the short party transfers the underlying security to the long party.
• The underlying security is not readily tradable on an established securities market.
• The short party posts the underlying security as collateral with the long party.

Please see full advisory below for more information.