April 26, 2012 / 10:16 PM / 8 years ago

U.S. options exchanges sound alarm on new tax rules

* Tax rules meant to crack down on dividend-tax avoidance

* Exchanges, others fear new rules overreach

By Patrick Temple-West and Ann Saphir

WASHINGTON, April 26 (Reuters) - Options exchanges and other financial players worried about proposed new tax rules on U.S. dividend tax withholding for foreign investors will vent their objections at a public hearing held by the U.S. Internal Revenue Service on Friday.

In January, the IRS and the Treasury Department published the proposed rules - expected to kick in on Jan. 1, 2013 - that would put withholdings for foreign investors on dividend-equivalent swap payments on a par with stock dividends.

The rules stem from a March 2010 law aimed at combating dividend-tax withholding avoidance by foreigners.

A non-U.S. stockholder is subject to a 30 percent withholding tax on dividends from direct ownership of a stock.

But there is no tax withheld on dividend-equivalent payments from swap contracts.

“The IRS had a reason for doing what it did,” said Stephen Land, a partner with law firm Linklaters LLP.

“They’re very worried about leaving any openings, which is why they took a broad approach ... But they created a system that simply cannot be complied with,” he said.

Options exchange operator CBOE Holdings Inc said up to 20 percent of U.S. options volume could be threatened by the new rules, which some financial firms fear are too broad.

Andy Nybo, head of derivatives research at Tabb Group Inc., said: “The main concern from CBOE or any other options exchange would be that demand for U.S.-listed options products will suffer.”

OneChicago LLC, a single-stock futures exchange, said in a letter to the IRS and Treasury that the regulations would likely prohibit foreign customers from trading its products.

In addition to U.S. exchanges, Deutsche Bank AG, the Abu Dhabi Investment Council and others have submitted comment letters asking for changes to the regulations.

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