Tax Planning
Sourcing Borrow Fees in Securities Lending and Repo Transactions: Proposed IRS Regulations Unpacked
Notice 2025-63 signals upcoming rules defining how “borrow fees” in securities lending and repo transactions are sourced—based on the residency of the recipient—important for investors and institutions.
By NomadicTax Research Team • 5-8 min read • November 22, 2025
## What Is Notice 2025-63 About?
IRS **Notice 2025-63**, part of the Internal Revenue Bulletin 2025-46 (November 10, 2025), announces that the Treasury and IRS intend to issue **proposed regulations** addressing how certain **borrow fees** (and negative rebates) paid in securities lending or sale-repurchase (repo) transactions are sourced.([irs.gov](https://www.irs.gov/irb/2025-46_IRB?utm_source=openai))
Specifically, under the proposed rules, the **source** of such fees would be determined based on the **residence of the recipient**. This could affect tax withholding, income sourcing for foreign investors, treaty benefits, and reporting.([irs.gov](https://www.irs.gov/irb/2025-46_IRB?utm_source=openai))
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## Why This Matters
- Sourcing determines whether income is U.S. source (taxable to nonresident aliens, subject to withholding) or foreign source (not taxable or treated differently).
- A change in sourcing rules may impact **foreign financial institutions**, **mutual funds**, **hedge funds**, and **foreign beneficiaries** who earn fees from securities lending or repo trades.
- It could affect how **withholding tax** and **tax treaties** apply to those payments if recipients are non-U.S. residents.
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## Key Features Proposed
- Applies to securities lending and sale-repurchase transactions documented under **industry-standard master agreements** and ordinary investment/business activities.([irs.gov](https://www.irs.gov/irb/2025-46_IRB?utm_source=openai))
- “Borrow fee” includes explicit fees or “negative rebates” where the borrower posts cash collateral and pays net fees beyond returns, especially in high demand or low interest environments.([irs.gov](https://www.irs.gov/irb/2025-46_IRB?utm_source=openai))
- Residency of the recipient, determined under IRC section 988(a)(3)(B), will control source allocation.([irs.gov](https://www.irs.gov/irb/2025-46_IRB?utm_source=openai))
- The proposed regulations allow taxpayers to rely on rules in advance of finalization for certain transactions.([irs.gov](https://www.irs.gov/irb/2025-46_IRB?utm_source=openai))
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## Example Scenarios
| Investor Type | Impact Under Proposed Rule |
|---|---|
| Foreign bank earning borrow fees from U.S. securities lending | Under rules, its income would be U.S.-sourced, potentially subject to U.S. withholding, unless treaty relief applies. |
| U.S. domestic fund receiving repo fees from counterparties overseas | Fees paid to U.S. fund are taxed as they always are; but documenting payer and recipient residencies becomes crucial. |
| Investor using master agreement and engaging in repo with cash collateral | Negative rebates or fees above cash collateral returns will be sourced based on recipient’s residence. |
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## Actionable Steps Now
1. **Review or negotiate master agreements** for securities lending or repos to ensure clarity on parties, fee definitions, and residency.
2. **Track recipient residency**: ensure accurate documentation for counterparty firms, custodians, and trustees.
3. **Consult tax treaties**, especially those with non-U.S. parties, to assess potential withholding or exemptions.
4. **Monitor IRS publications**: the proposed rules will be published in the Federal Register; comments may be solicited.
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## Considerations and Possible Challenges
- Master agreements or confirmations might not always clearly distinguish fees or negative rebates.
- Transactions with nonstandard documentation or infrequent counterparts may fall outside the proposed regulation’s “specified” scope.
- Treaties may limit or modify treaty-beneficial sourcing—need to align with residency and treaty obligations.
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## Final Thought
Notice 2025-63 is not yet law, but it provides a strong signal about how the IRS expects to treat income from borrow fees, repos, and securities lending going forward. Investors and businesses should begin reviewing contracts and tax strategies now so that when the proposed regulations arrive, they are ready.