IRC Section 871(m) guidelines - CBF issued securities
Clearstream Banking will adopt the following guidelines for the acceptance and the treatment of securities issued as stand-alone or under programme subject to 871(m) regulations of the U.S. Internal Revenue Service (IRS). These guidelines address the specific treatment of inventory or “unsold position” following numerous discussions with issuers and their agents (see attachment below).
Security acceptance to collective safe custody (CSC - “Girosammelverwahrung”)
CBF will hold 871(m) securities, provided that, in addition to the prevailing rules and regulations for the admission to CSC, the following prerequisites are met by the issuers:
Delivery of physical global notes via the EDT Lean service or the Securities Counter of CBF
- The terms of the respective issue - or alternatively a cover letter signed by the issuer - clearly indicates whether the security is or is not subject to 871(m); and
- Confirmation of the applicable method of withholding; either
- The issue will only pay actual cash dividends; or
- The maximum tax rate of 30% will be withheld at source by the issuer of the note on any Dividend Equivalent Payment (DEP), notwithstanding that CBF will provide the issuer with a valid form W8IMY certifying to the Chapter 3 status of Qualified Intermediary that assumes primary withholding responsibility and Chapter 4 status (FATCA) of Reporting Model 1 FFI.
- In addition, CBF expects the entity requesting the eligibility of individual ISINs to the CBF holding and clearing system, the issuer’s agent (“emissionsbegleitende Bank”) to flag and notify distinctly the new issuances that are subject to 871(m) in the form used for admission requests. Furthermore, the issuer’s agent should also confirm on a case by case basis what 871(m) withholding process is applicable (as described above).
Delivery of new issues via EDT Classic, EDT Premium, EDT Security Box or EDT Trades only (in the following: “distinguished EDT service”)
- The terms of the respective issue should clearly indicate whether the security to be admitted is or is not subject to 871(m).
- The CBF account holder using a distinguished EDT service in his capacity as issuer or issuer’s agent for requesting the admission of individual ISINs to direct holding in CSC with CBF is expected to flag and notify distinctly the new issuances that are subject to 871(m) regulations in the EDT table to be provided.
- Until further notice, the free-text field “Comment Field/ Kommentarfeld” of the EDT table must be used and filled as follows for the respective ISIN:
- “subject to 871(m)”;
- Applicable method of withholding: “MOW: payment of actual cash dividend only” or “MOW: tax withheld at source by issuer on any Div. Equiv. Paym. (DEP)”.
Note: The free-text field is limited to a maximum of 100 characters.
For securities subject to a material change and losing their grandfathered status, in addition to any amendment of the issuance documentation, the above-noted information should be included and CBF should be notified of such material change by the issuer or its agent.
Finally, for issuances where the tax is withheld upstream by the issuer on any DEP, CBF expects the issuer to provide reporting information in connection with the form 1042-S reconciliation process according to the attached guidelines and using only the attached template.
Tax withholding and reporting
For issues paying only actual cash dividends:
The process will remain the same as for any U.S. dividend payment.
For issues paying only DEP withheld upstream by the issuer:
Despite the fact that CBF is acting as Qualified Intermediaries assuming primary Non-Resident Alien (NRA) withholding responsibility and 1099 reporting and backup withholding responsibility, the actual tax withholding is handled by an upstream agent. CBF will report the DEPs in the 1042s sent to its customers using the following features:
- The income will be reported with the income code “40 -Other dividend equivalents under IRS section 871(m)”.
- The tax will be reported within box “8 - Tax withheld by other agents”.
We further would like to highlight that this procedure is intended to provide a working framework in order for CBF to handle 871(m) securities, despite the uncertainties that are still surrounding 871(m) regulations and their implementation on the market.