Reference
Clearstream Banking1 and its U.S. depository are currently reviewing the potential tax impact of Internal Revenue Code (IRC) Section 305(c) on debt instruments convertible into equity of a U.S. corporation, whenever there is a Convertible Rate Adjustment (CRA).
IRC Section 305(c) treats an increase of CRA as a potentially taxable dividend to the convertible debt holder at the time the CRA occurs. Since there is no cash being received by the holder of the debt at the time of the CRA, this is considered as a deemed distribution to the convertible debt holder.
A withholding agent may be required to withhold and report on the deemed distributions under Section 305(c). It is currently unclear as to how exactly Section 305(c) applies to CRAs and whether withholding obligations apply to any resulting deemed dividends, including how the amount of the deemed dividend should be determined, and how, and by whom withholding needs to be remitted to the Internal Revenue Service on these deemed dividends.
The above is for information only. We are expecting further clarifications and will provide more information as it becomes available.
Further information
For further information about procedures, customers may contact the Clearstream Banking Tax Help Desk, Clearstream Banking Client Services or their Relationship Officer.
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1. Clearstream Banking refers collectively to Clearstream Banking AG, registered office at 61, Mergenthalerallee, 65760 Eschborn, Germany and registered in Register B of the Amtsgericht Frankfurt am Main, Germany under number HRB 7500, and Clearstream Banking S.A., registered office at 42, avenue John F. Kennedy, L-1855 Luxembourg, and registered with the Luxembourg Trade and Companies Register under number B-9248.