Notional principal contract
The examples and perspective in this article may not represent a worldwide view of the subject. (December 2010) |
The term notional principal contract (NPC) is a term of art used by
Definition Provided in Treasury Regulations
For U.S. federal income tax purposes, currently applicable
Tax Consequences
Any amounts received under an NPC must be recognized by the taxpayer in accordance with the rules governing the recognition of such payments in the Treasury Regulations, which may override the taxpayer's normal method of accounting for U.S. federal income tax purposes. (Treas. Reg. § 1.446-3(e)(2)(i)). In general, amounts paid or received under an NPC are treated as ordinary income (and not capital gain) for U.S. federal income tax purposes, and are sourced by the residence of the recipient (e.g., if a non-U.S. resident receives a payment under an NPC, that payment is, in general, treated as non-U.S. source income for U.S. federal income tax purposes). The usual result of this treatment is that non-U.S. persons can receive payments on an NPC without outbound U.S. federal income tax withholding tax being applied. However, the U.S. federal income tax rules governing NPCs, withholding tax and the taxation of financial products, in general, is an intricately complicated subject, and taxpayers as a general matter almost always seek the assistance of a competent adviser to assist them in these matters.
A 2016 article in the
References
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- ^ "26 CFR 1.446-3 - Notional principal contracts". Legal Information Institute. Cornell University Law School. 1 April 2012. Retrieved 22 February 2013.
- ^ Knight, Ray A.; Lee G. Knight (1 January 2016). "Hedging Market Risks: Accounting for Notional Principal Contracts". The Tax Adviser. AICPA. Retrieved 12 September 2016.