On October 23, 2025, the Internal Revenue Service (IRS) issued Notice 2025-63, announcing an intent to issue proposed regulations on the sourcing of income from certain securities lending and sale-repurchase (repo) transactions. Under the proposed regulations described in the notice, income from certain "borrow fees" would be sourced to the residence of the recipient. The Notice clarifies an unsettled corner of the sourcing rules and provides relief to financial institutions, investment funds, and other taxpayers engaged in certain types of cross-border securities lending and repo transactions.

In a securities lending transaction, a lender temporarily transfers securities to a borrower, and the borrower provides collateral to secure its obligation to return equivalent securities at a later date. If the borrower posts non-cash collateral, the borrower is typically required to pay an explicit borrow fee to the lender. If the borrower posts cash collateral, the lender may implicitly receive a borrow fee, equal to the difference between the return the lender earns on the collateral and any "rebate" the lender provides to the borrower. In certain circumstances, a securities borrower posting cash collateral may pay an explicit "negative rebate" to the securities lender. A repo transaction is an agreement to transfer securities to a lender for cash and to repurchase equivalent securities in the future at a specified price. In economic terms, a repo transaction may functionally resemble either a secured loan of money or a securities lending transaction. 

To qualify for the sourcing rule described in Notice 2025-63, the borrow fee or negative rebate must arise from a securities lending or repo transaction as defined in Treas. Reg. § 1.861-2(a)(7) (debt securities) and § 1.861-3(a)(6) (equity securities). The transaction at issue must be governed by a standardized agreement, such as the Securities Industry and Financial Markets Association (SIFMA) Master Securities Loan Agreement or the Global Master Repurchase Agreement, which reflect industry-standard legal and commercial terms. The transaction must occur in the ordinary course of business or investment activity; the Notice does not apply to bespoke or structured transactions. Finally, regardless of how a payment is labeled, the payment must provide compensation to the lender for making securities available to the borrower.

Based on recently released Chief Counsel Advice (CCA), the IRS reevaluated its position on the sourcing of borrow fees as recently as this summer. In CCA 202548005, dated July 18, 2025, and released November 23, 2025, the IRS concluded that borrow fees paid by U.S. persons to foreign persons should be sourced to the residence of the payor. Under this analysis, the borrow fees in the CCA were U.S.-source fixed, determinable, annual, or periodical (FDAP) income, subject to gross basis taxation under section 871(a) or section 881(a). Following the release of Notice 2025-63, the IRS issued a superseding CCA, which reversed the position in CCA 202548005. See CCA 202548004 (dated October 23, 2025, released November 23, 2025). Based on an application of Notice 2025-63, the replacement CCA concludes that borrow fees paid to foreign counterparties constituted foreign source income, which would not be subject to tax under section 871(a) or section 881(a). 

The proposed regulations described in Notice 2025-63 would apply prospectively to tax years ending after the date of publication in the Federal Register. The forthcoming proposed regulations would permit taxpayers to apply the regulations, once finalized, before the applicability date. Of immediate relevance, taxpayers may rely on Notice 2025-63 for transactions entered into before the proposed regulations are published. Withholding agents should review their transactions to determine the potential application of the Notice. The analysis in CCA 202548004 appears to confirm that taxpayers may rely on the Notice for transactions undertaken before the Notice was published. Foreign taxpayers should evaluate potential claims for refund of gross basis tax withheld by domestic counterparties in historic transactions.

For more information, please contact:

Jeffrey M. Tebbs, jtebbs@milchev.com, 202-626-1480

Jaclyn Roeing, jroeing@milchev.com, 202-626-5929

The information contained in this communication is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information, please contact one of the senders or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

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