Note to US Investors
The new rules will apply to, inter alia, foreign investment funds (and US investment funds with foreign investors) in receipt of the following:
equity swap payments – income from swaps relating to US equities (and potentially other derivatives) will be treated as US source income and subject to 30% withholding tax to the extent that the income is attributable to or calculated by reference to dividends paid by a US corporation; and
gross proceeds from the sale of US securities, as well as payments of US source interest that may currently be exempt from US withholding tax – these will automatically be subject to 30% withholding tax unless the fund enters into an agreement with the US Internal Revenue Service (“IRS”). Such agreement would impose requirements to disclose full details of all and any direct or indirect US investors, to the extent and in the manner prescribed under the new legislation, and may mandate implementation of certain know-your-customer type requirements and subject the fund to periodic compliance audits.
Without an advance agreement with the IRS, the effect of this latter requirement would be to potentially “turn off” the portfolio debt and bank deposit exception, and, in addition, subject gross proceeds on the sale of US stocks and securities to a 30% withholding tax. Under current law there is no US tax liability on these items.
Clearly, these new rules, if enacted, will add considerably to the administrative burden of foreign entities investing into the US, and could generate significant tax leakage going forward depending on the nature of the investment.
Should you require any further information, please get in touch with your local KPMG contact.
5th November, 2009