What is the 871(m) rule?
The Section 871(m) in the U.S. Internal Revenue Code (IRC) is designed to prevent non-U.S. citizens from avoiding withholding tax on U.S. equities via derivatives. Withholding tax applies when a cash dividend is paid. The normal tax rate in the US is 30%, but the W8 form reduces the tax rate for you to 15%.
The US withholding tax now also applies to “dividend equivalent income” from issuer products whose underlying is a US stock. These are, for example, warrants, discount certificates or futures.
Trading in warrants and certificates on US equities is currently restricted.
Trading Restriction
Under the 871(m) rule, issuers of these instruments are required to correctly record the tax situation of the holders. However, this is not feasible in practice. Therefore, in order to prevent the US withholding tax from being evaded in this way, trading in these instruments is no longer possible. According to IRS legislation, this also affects derivatives whose underlying asset does not pay or has not paid a dividend. Even if only one component of the underlying is a US stock, trading is not possible.
Impacted Instruments
- Warrants
- Convertible Bonds
- Certificates
- Structured Notes
- Indices
- Securities lending
- Exchange-listed Derivatives
These instruments are affected if the following conditions are met:
- The underlying securities are US equities – regardless of the issuer’s country of residence
- These US equities pay a dividend during the life cycle of the derivatives
- The derivatives have a delta calculated by the issuers that is equal to 1 (derivatives issued on or after January 1, 2019 with a delta greater than or equal to 0.8 are also covered).
Order Rejection
If you attempt to submit an order on the impacted financial products, your order will be rejected. Various trading platforms will display an error message notifying you of the 871(m) restriction.
The information provided here are intended to offer simple support, but they do not encompass all criteria of the 871(m) rule. Therefore, LYNX cannot guarantee that an instrument admitted according to this information is actually tradable.
FAQ
No, trading in warrants and certificates on US equities is currently restricted.
871(m) rule has been designed in in the U.S. Internal Revenue Code (IRC) to prevent non-U.S. citizens from avoiding withholding tax on U.S. equities via derivatives.
Warrants, convertible bonds, certificates, structured notes, indices, securities lending and exchange-listed derivatives are covered if:
- The underlying securities are US equities – regardless of the issuer’s country of residence
- These US equities pay a dividend during the life cycle of the derivatives
- The derivatives have a delta calculated by the issuers that is equal to 1 (derivatives issued on or after January 1, 2019 with a delta greater than or equal to 0.8 are also covered).