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The IRS intends to issue proposed rules on sourcing for borrow fees, or negative rebates, paid with respect to securities lending and sale-repurchase transactions, the agency announced (Notice 2025-63) on Oct. 23.
Under the forthcoming proposed regulations, such borrow fees are sourced based on the residence of the recipient, as determined in the same manner as under Section 988(a)(3)(B).
The notice specifically defines the term “borrow fee” as a fee that meets both of the following criteria:
- It is paid pursuant to a securities lending transaction or sale-repurchase transaction (each as defined in Treas. Reg. §§1.861-2(a)(7) and 1.861-3(a)(6)) that is documented on an industry-standard master agreement and confirmation (or electronic equivalent thereof) with standard market terms and entered into in the ordinary course of the taxpayer’s and counterparty’s trades or businesses or pursuant to their normal investment activities or objectives; and
- It is paid, in substance, to compensate the lender of the securities (including a cash borrower in a sale-repurchase transaction) for making its securities available to the borrower of the securities (including a cash lender in a sale-repurchase transaction).
The forthcoming proposed regulations will apply prospectively, with an option for early adoption once finalized. However, taxpayers may rely on the rules described in this notice before the forthcoming proposed regulations are published.
Grant Thornton insight:
Taxpayers who engage in securities lending or sale-repurchase transactions should review their existing arrangements to determine whether any borrow fees fall within the scope of this notice and assess whether early reliance on the notice is appropriate.
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