A dividend equivalent payment is any gross amount that references the payment of a dividend on a U.S. equity and that is used to compute any net amount transferred to or from the long party, even if the long party make a net payment to the short party or the net payment is zero. Accordingly, such payments would include not only an actual payment in lieu of a dividend but also an estimated dividend payment that is implicitly taken into account in computing one or more of the terms of the transaction, including interest rate, notional amount or purchase price.
In the case of a listed call option on a U.S. stock, for example, the holder of the call is not entitled to receive a dividend unless the option is exercised prior to the dividend ex-date. Nonetheless, the premium paid by the holder to purchase the option implicitly takes into account the present value of the expected dividends over the option term. Since this factor serves to lower the payment from the option buyer to the seller, it is viewed as a dividend equivalent payment potentially subject to the rules.