U.S. Tax Reporting: Update on the clearing of sec.871(m) Internal Revenue Code (IRC) transactions through Eurex Clearing AG

1.    Introduction

This Circular contains an update regarding U.S. Tax Reporting and provides more information with respect to the clearing of sec.871(m) IRC transactions through Eurex Clearing AG. Within this circular we shall provide information regarding:

A.    Eurex Clearing AG Qualified Derivatives Dealer (QDD) Status

B.    Clearing Member Status and requirements

C.    Derivatives Transactions/Capacity

D.    Reporting Obligation of Eurex Clearing AG in front of the Internal Revenue Service (IRS)

E.    Modified Eurex Clearing AG Reporting Form

2.    Details

Information and background

In conjunction with the published Qualified Intermediary Agreement (published by the IRS dated 13 December 2022) updates of the legal requirements and reporting responsibilities shall be taken into account for processing transactions out of sec.871(m) IRC.

A.    Eurex Clearing AG Qualified Derivatives Dealer (QDD) Status

Please consider that Eurex Clearing AG applied for the renewal of the QI Agreement (2023 Qualified Intermediary Agreement, Rev.Proc.2022-43) which was confirmed by the Internal Revenue Service (IRS) beginning of 2024. Based on the legal definition, Eurex Clearing AG is acting within the potential in-scope product for sec.871(m) IRC transactions on a principal-to-principal basis as Central Counterparty (CCP). (Please refer to the paragraphs in Treasury Regulations §1.871-15).

Regarding sec.871(m) IRC transaction reporting, Eurex Clearing AG is defined as “reporting” party in front of the IRS and is therefore obliged to report the relevant transactions between the Clearing Member and Eurex Clearing AG out of a tax year via the tax form 1042-S on behalf of the respective Clearing Member to the IRS within the mandatory deadline 15 March of the following year.

B.    Clearing Member Status and requirements¹

Eurex Clearing AG has classified its Clearing Member as eligible or non-eligible with respect to the clearing of potential in-scope products for sec.871(m) IRC based in the documentation provided by the Clearing Member.

¹  (Please refer also to the Clearing Conditions Chapter II, Part 1 number 1.7. para.(1) to (6).)

Non-U.S. domiciled Clearing Members

Eurex Clearing AG has limited the accessibility for clearing of potential in-scope products for sec.871(m) IRC transactions to certified QI’s assuming primary chapter 3 and chapter 4 withholding tax obligations or QDD’s. The Clearing Member will need to provide upfront valid W8-IMY U.S. tax forms with the respective certification confirming at least one of the aforementioned options. If applicable, the relevant account number (Client Account/s, Proprietary Account/s, Market Maker Account/s) for which the potential transactions shall be cleared should be stated in Line 10 of the U.S. tax form.

The Clearing Member long party is the determining/responsible party regarding the definition of potential in-scope products for sec. 871(m) IRC transactions and in this capacity the Clearing Member long party must confirm until the 10th of the following month whether or not the derivative transaction is in-scope for sec. 871(m) IRC and, hence, is subject to reporting by Eurex Clearing AG (i.e. a nil reporting of assigned Clearing Member is mandatory).

The reportable data shall be reported within the attached excel-file and need to be provided to the email address reporting871m@eurex.com. 

Assigned Clearing Members need to ensure the complete reporting for all relevant account/s. Please note that all relevant documents/reportings for the respective tax year must be submitted to Eurex Clearing AG by the 10 January of the year following the tax year at the latest.

Please consider that these derivatives transactions can only be executed and/or cleared on certified accounts. Hence, in case of a give-up or position transfer the account ending-up with the position needs to be a certified one.

The requested data shall be integrated on basis of the published rules and regulations of the IRS stated in the paragraphs and segments of § 1.871-15 in its current version. 
The provided data shall be reconciled with the Eurex Clearing AG internal assessment for potential in-scope products for sec.871(m) IRC transactions; in case of deviations Eurex Clearing AG will inform the Clearing Member acting as determining/responsible party.²

² (Deviation regarding assets in-scope/out of scope for sec.871(m) IRC transactions might not be taken into account, the duty for classification of assets in scope for sec.871(m) IRC reporting lies with the determining/responsible party.)

Final aligned data for the relevant tax year from the Clearing Member shall be reported by Eurex Clearing AG via the U.S. Tax form 1042/1042-S to the IRS by the latest of 15 March of the following year. Assigned Clearing Members will receive a copy of the filed form with the IRS.

Clearing Members shall request from Eurex Clearing AG for their documentation purposes the tax form W8-IMY covering the relevant account/s.

Please take into consideration that Eurex Clearing AG will not report any transaction data out of the internal assessment, but in conjunction with the QDD Status of Eurex Clearing any potential deltas in filed tax forms 1042-S with the IRS and internal data of Eurex Clearing AG might be reported towards the IRS in accordance with section 7 out of the QI Agreement 2023 (please refer to 26 CFR 1.1441-1(e)(5) and (6), 2023 Qualified Intermediary Agreement, Rev. Proc. 2022-43).

C.    Derivatives Transactions/Capacity

At the first business day of each year, all exchange traded derivatives listed at Eurex and cleared by Eurex Clearing AG are reviewed to establish an initial scope of products which must be analysed and potentially reported for the running period – the calendar year/tax year– to comply with the obligations that arise from the provisions of the Internal Revenue Code. The internal assessment regarding potential in-scope products for sec.871(m) IRC transactions and the respective “capacity flag” ensures clearing of potential in-scope products for sec.871(m) IRC transactions with eligible Clearing Members.

Over the year, this initial scope needs to be amended if new products which are deemed as in-scope products are listed.

Eurex Clearing AG has established an internal system regarding the identification of potential in-scope products for sec.871(m) IRC in order to achieve the legally required reconciliation with data provided by the respective assigned Clearing Member and the available data out of the transaction system of Eurex Clearing AG.

Please consider that Eurex Clearing AG is not the determining/responsible party within the meaning of the Treasury Regulations § 1.871-15 (p) and hence is not required to provide its Clearing Member with any information identifying potential in-scope products for sec.871(m) IRC transactions, applicable deltas, dividend equivalent amounts or any timing of withholding. 

D.    Reporting Obligation of Eurex Clearing AG in front of the Internal Revenue Service (IRS)

Each assigned Clearing Member, which is acting in a potential in-scope product of sec.871(m) IRC transactions and having on the end of a business day long positions in such transactions, shall be classified as determining/responsible party. The Clearing Member classified as “determining/responsible party” is obliged to determine whether a transaction is in-scope for sec.871(m) IRC transactions and any “Dividend Equivalent Amount” (please see the Treasury Regulations § 1.871-15(c) based on the holding positions of such derivative).
 
As shared in Point B. Eurex Clearing as “reporting party” and be part of the transaction chain of such derivative products is obliged to fulfil the reporting requirement out of sec.871(m) IRC transactions in front of the IRS on yearly basis for the respective tax year. For providing the relevant data, please refer to Point 5. Modified Eurex Clearing AG Reporting Form.

Eurex Clearing AG will provide the IRS with the final Clearing Member data in tax form 1042-S per the relevant tax year within the legal deadline 15 March of the following year. The assigned Clearing Members, which have provided their information, shall receive the confirmation of the successful filing with the IRS. (For the tax year 2023 and 2024 the confirmation shall be available on paper form).

Late deliveries from an assigned Clearing Member after the legal deadline might be reported in front of the IRS only on a best effort basis; potentially a penalty fee for late filing including late interest from the IRS could occur. These fees may be billed to the Clearing Member concerned.

E.    Modified Eurex Clearing AG Reporting form

We have modified the already available tax reporting form in order to easier integrate the necessary data. Please have a look inside the attached reporting file.

Clearing Conditions

Please refer to Part II section 1.7. “Obligation with regard to the Tax Legislation of the United States of America” paragraphs (1) to (6) and the published Eurex Clearing Circulars.

Please refer also to the information on the Eurex Clearing website www.eurex.com/ec-en/​ under the following path: Rules & Regs > Regulations > U.S. Taxation.

If you have and non-tax related question, please contact your Clearing Key Account Manager.

Disclaimer:

Please consider that Eurex Clearing AG is due to the legal status not in the position to provide any tax advice or tax assistance, for tax questions, please align with your tax department. Information shared within this Circular shall be taken into account for providing operational understanding and clearance regarding U.S. tax laws/regulations out of sec.871(m) IRC transactions only.

July 2024
 

Attachment: 

• Sec.871(m) IRC Reporting Template

Further information