In brief

In Notice 2025-63 (“Notice”), Treasury and the IRS announced forthcoming proposed regulations that will source borrow fees in industry-standard securities lending and sale-repurchase (repo) transactions to the residence of the recipient. Neither the Code nor Treasury Regulations expressly source borrow fees so the source of these payments is currently uncertain.

Sourcing borrow fees based on the residence of the recipient means that non-US securities lenders, such as non-US hedge funds, generally will not be subject to withholding on borrow fees. The forthcoming proposed regulations will provide welcome certainty. Taxpayers can rely on the Notice before the proposed regulations are published.

Recommended actions

• Withholding agents relying on the Notice should review their transactions and counterparty documentation to confirm that they are within the scope of the Notice.
• The Notice applies to securities lending and sale-repurchase transactions using industry-standard agreements. Market participants in transactions based on customized documents should consult with their tax advisors before relying on the Notice.

Securities lending transactions

In a securities lending transaction, a securities lender lends securities to a securities borrower. The securities borrower has an obligation to return equivalent securities. The securities borrower typically posts collateral to the lender as security for borrower’s obligation to return the borrowed securities. If the securities borrower posts non-cash collateral, the securities borrower typically pays the securities lender a “borrow fee.” If the securities borrower posts cash collateral, the securities lender pays an amount to the securities borrower referred to as “rebate.” A securities borrower that posts cash collateral may in some cases pay an explicit fee to the securities lender (referred to as “negative rebate”).

Sale repurchase transactions

In a sale-repurchase transaction, the cash lender purchases securities from the cash borrower subject to an agreement for the cash borrower to repurchase equivalent securities in the future at a prearranged price. A sale-repurchase transaction can function as a secured loan or a securities lending transaction.

Source of borrow fees

In the Notice, Treasury and the IRS announced forthcoming proposed regulations that would source borrow fees based on the residence of the recipient. The forthcoming proposed regulations will apply to a securities lending  or sale-repurchase transaction as described in in Treas. Reg. §§1.861-2(a)(7) and 1.861-3(a)(6).

The forthcoming proposed regulations will define a “borrow fee” (including a negative rebate) as a fee that is (1) paid pursuant to a securities lending transaction or sale-repurchase transaction that is (i) documented on an industry-standard master agreement and confirmation (or electronic equivalent thereof) and (ii) entered into in the ordinary course of the taxpayer and counterparty’s trades or businesses or pursuant to their normal investment activities or objectives, and (2) paid in substance to compensate the lender of the securities (including a cash borrower in a repo) for making its securities available to the borrower of the securities (including a cash lender in a repo). The residence of the recipient is determined under section 988(a)(3)(B).

The Notice only applies to industry-standard securities lending and sale-repurchase transactions (e.g., MSLAs, GMSLAs, MRAs). The Notice does not address amounts paid with respect to transactions that do not have standard market terms, including one-off structured and bespoke transactions.  Whether a fee is a borrow fee for purposes of the proposed regulations depends on the substance of the fee rather than its label. The Notice does not address payments other than borrow fees under securities lending and sale-repurchase transactions or the overall tax characterization of these transactions.

Effective date

The proposed regulations will apply prospectively to taxable years ending after publication in the Federal Register. Taxpayers can choose to apply the regulations (once finalized) before the publication date. However, taxpayers can rely on the rules described in the Notice before the proposed regulations are published in the Federal Register.