The Hiring Incentives toRestore
Employment Act (or HIRE Act) has now come into
effect in the United States and it will likely be relevant to
Canadian participants in the OTC derivatives and securities lending
By way of background, the HIRE Act added a new U.S. withholding
tax provision for certain equity-related swaps, sale-repurchase
transactions and securities lending transactions. The HIRE Act
applies to dividend equivalent payments made on or after September
14, 2010. Dividend equivalent payments include payments that are
contingent on, or determined by reference to, U.S.-source dividends
in sale-repurchase and securities lending transactions, including
certain equity swap transactions where a non-U.S. counterparty buys
or sells the underlying U.S. security from or to its counterparty.
After March 18, 2012, cross-border dividend equivalent payments
made under all equity swap transactions will be treated as
U.S.-source dividend income, unless the U.S. Department of the
Treasury issues regulations exempting any particular
equity–related swap from its application. As a result,
any U.S. source dividend equivalent payment received or paid by
Canadian parties, for example, generally will be subject to U.S.
withholding tax even if there is no U.S. counterparty to the
transaction. The withholding tax is imposed on the "gross
amount" of any dividend-equivalent payment used in computing
any net amount paid to the non-U.S. counterparty in connection with
the transaction. The U.S. withholding tax generally will be imposed
at a 30% rate, unless the applicable withholding rate is reduced
under the terms of an income tax treaty and proper documentary
evidence is timely provided to the appropriate counterparty.
As a result of these new rules, ISDA published the 2010 HIRE Act Protocol
to enable parties to amend the terms of their existing Covered
Master Agreements to reflect the new U.S. withholding requirements
enacted under the HIRE Act and the increased tax risk associated
with IRS audits of equity swap transactions. Adherence to the
Protocol is voluntary.
Because the HIRE Act applies to payments made on certain swaps
and other contracts on or after September 14, 2010, regardless of
when the contract was entered into, it is important for Canadian
market participant to: (1) review existing agreements, (2) consider
carefully the impact of the HIRE Act withholding requirements on
their transactions and (3) assess the implications of adherence or
non-adherence to the 2010 HIRE Act Protocol.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The British Columbia Court of Appeal has recently considered whether the doctrine of unconscionability can be invoked to set aside a contractual clause providing for the payment by one party to the other...
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).