Dividend Rolls or Swap Contracts on Dividends

Discussion in 'Taxes and Accounting' started by ysettle, Jan 26, 2019.

  1. ysettle

    ysettle

    Is anyone familiar with Dividend Rolls. I remember from a few years ago, there used to be offshore entities that would enter into swap contracts to temporarily receive a stock about to go ex dividend, and then sell it back after the ex-date. The contract would account for any gain/loss in the stock price over the transfer date, so this was purely a transaction for tax efficiency. I believe the companies were offshore, so they were not subject to the full extent of US taxes on ordinary dividend income

    Do these types of forward contracts still exist and does anyone know where to get more information if they do. Thank you in advance
     
    Stockolio likes this.
  2. This is institution stuff I believe... Just reading about it now, ill likely never do a dividend swap, the competition is quite good in that arena.

    Good Post!
     
  3. Sig

    Sig

    There's actually a section of the U.S. tax code that (paraphrasing) says any transaction done purely for tax efficiency with no other purpose is illegal. Won't matter to you directly if you're not a U.S. citizen, company, or company owned or controlled by a U.S. citizen, but that clause was added to kill those setups and I think was pretty effective at least at accomplishing that.
     
  4. newwurldmn

    newwurldmn

    I thought most of these things were for European countries. An Italian may not pay withholding tax on a Nordic stock so they will swap with a Norwegian to save them the dividend tax.
     
  5. newwurldmn

    newwurldmn

    Many instruments are designed to avoid taxes and I think the IRS is actually lenient on that stuff. I’m sure you have been pitched the bullshit captive insurance schemes.
     
  6. FSU

    FSU

    If you are trying to avoid paying taxes on a dividend, you may look into buying a long term leap combo. This is when you buy a call and sell the same strike put (you are synthetically long the stock). The expected dividends should be written into the price of the options and I believe leaps are eligible for capital gains if held long enough.
     
  7. ysettle

    ysettle

    @FSU - appreciate the advice but actually the opposite situation.
     
  8. ajacobson

    ajacobson

    Dividend sweep trades? They were done with match L/S itm call options. OCC did an end to these when they extended the L/S prohibition to professional accounts.
     
  9. These transactions were called 'Yield Enhancement Trades" and were effectively eliminated by the enactment of IRS rule 871(m).

    The US Delta 1 trade desks would enter into a Securities Lending transaction with the Off-Shore party. The Off-Shore would deliver the stock just before record date and they would get a Delta derivative in return (less a haircut on the actual dividend amount). In this way the off-shore party had no withholding obligations for the dividend payment.

    Treasury and IRS put an end to this with 871(m) which requires taxes to be withheld for all dividends as well as all dividend equivalents with a very broad definition to the latter to discourage any type of derivative to be used as a substitute.

    David