Insurance: Dividend equivalents from U.S. sources paid to nonresidents

Regulations on dividend equivalents, from U.S. sources

The Treasury Department and IRS today released for publication in the Federal Register final and temporary regulations (T.D. 9734) and, by cross-reference, proposed regulations (REG-127895-14) as guidance to nonresident alien individuals and foreign corporations that hold certain financial products providing for payments that are contingent upon or determined by reference to U.S.-source dividend payments.


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The following discussion concerns whether payments on life insurance or annuity contracts are dividend equivalents under these regulations. Read the final and temporary regulations [PDF 557 KB] and proposed regulations [PDF 267 KB] 


In January 2012, temporary and proposed regulations were released, addressing the treatment of dividend equivalents under section 871(m). In December 2013, final and re-proposed regulations were issued. In response to numerous written comments on the 2013 proposed regulations, the Treasury Department and IRS today released final regulations that generally adopt the 2013 proposed regulations, albeit with numerous modifications. The final regulations do not address payments on life insurance or annuity contracts, but temporary regulations provide some guidance. 

Certain insurance contracts

The 2013 proposed regulations did not specifically address whether payments on life insurance or annuity contracts are dividend equivalents when the payments are directly or indirectly contingent upon or determined by reference to the payment of a dividend from sources within the United States.

Commenters asserted that the existing rules that apply to life insurance and annuity contracts obviate the need for withholding under section 871(m).

Treasury and the IRS agreed with the commenters that the taxation of life insurance and annuity contracts issued by domestic insurance companies is adequately addressed under current law. The temporary regulations thus provide that there is no dividend equivalent associated with a payment that a foreign person receives pursuant to the terms of an annuity, endowment, or life insurance contract issued by a domestic insurance company (including the foreign or U.S. possession branch of the domestic insurance company).

Today’s regulations state that Treasury and the IRS are considering how section 871(m) is to apply to annuity, endowment, and life insurance contracts that reference U.S. equities and that are issued by foreign life insurance companies. Until further guidance is issued, the temporary regulations provide that these contracts also do not include a dividend equivalent when issued by a foreign corporation that is predominately engaged in an insurance business and that would be subject to tax under subchapter L if it were a domestic corporation. 

Similarly, the temporary regulations do not treat any portion of a payment received by a foreign life insurance company as a dividend equivalent when the payment is made according to the terms of an insurance contract, such as reinsurance, by a foreign corporation meeting the same requirements. 

Treasury and the IRS are also evaluating how section 871(m) is to apply to reinsurance contracts and has requested comments as to how section 871(m) should apply to foreign life insurance companies and the contracts they issue.

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