TaxBandits Knowledge Base

What is a QDD?

• A Qualified Derivatives Dealer (QDD) is a designation under U.S. tax regulations that applies to certain financial institutions that deal in derivatives, securities lending, and similar transactions. QDDs must comply with the Qualified Intermediary (QI) Agreement with the IRS.
   
• Typically, foreign financial institutions (FFIs) that are involved in derivatives transactions elect QDD status to avoid multiple layers of withholding tax on certain payments.
   
• A QDD must withhold and remit U.S. tax on dividend equivalent payments made to foreign persons under Section 871(m) rules. However, it is not subject to withholding on its own transactions as a principal, provided it meets the IRS requirements.
   
• A QDD must report its payments and withholdings on Form 1042. It also files Form 1042-S to detail income paid to foreign persons.