• IRS May Apply Economic Substance Doctrine to Securities Lending Transactions Entered to Avoid U.S. Withholding Tax
  • January 16, 2013
  • Law Firm: Alston Bird LLP - Atlanta Office
  • In generic legal advice released in November 2012 (AM 2012-009), the Chief Counsel’s Office, applying the economic substance doctrine, disregarded a typical securities lending transaction entered into before May 20, 2010, to avoid U.S. withholding tax. The IRS stated that it was aware of cases where financial institutions promoted such securities lending transactions to foreign customers as a way to avoid U.S. withholding tax based on Notice 97-66, despite the fact that no prior withholding tax was paid within the chain of transactions. AM 2012-009 concludes that, if the IRS determines that such a transaction lacked economic substance, (i) the lender may be treated as retaining ownership of the securities, and thus receiving a U.S.-source dividend subject to U.S. withholding tax under Code Section 871 or 881; and (ii) the borrower may be treated as the withholding agent with respect to the dividend and thus subject to U.S. withholding tax under Code Section 1441 or 1442 and 1461.