A new rule that brings some equity derivatives into the ambit of US withholding tax may undermine demand for hedging among overseas investors as brokers scramble to implement the requirements. Dividends from US securities paid to a non-US person are generally subject to a 30% withholding tax. Investors have in the past been able to use a loophole in US law to avoid the tax by buying a derivative (such as a swap) on the same equity, and receiving dividend-equivalent payments that are not taxable.
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