Tax

On October 9, 2024, the Treasury Department (“Treasury”) and the Internal Revenue Service (“IRS”) issued final regulations (the “Final Regulations”), which, in certain cases, terminate the continued application of Section 367(d) of the Internal Revenue Code (the “Code”) from a previous transfer of intangible property to a foreign corporation when the intangible property is repatriated to certain U.S. persons.

Background.

Section 367(d) of the Code provides rules for outbound transfers of intangible property (e.g., intellectual property) by a U.S. person (a “U.S. transferor”) to a foreign corporation. Under these rules, when a U.S. transferor transfers intangible property to a foreign corporation in an otherwise tax-free exchange under Sections[1] 351 or 361, the U.S. transferor is treated as having sold the intangible property in exchange for annual royalty payments (an “annual inclusion”) over the useful life of the intangible property (or a lump sum payment in the case of a disposition of the intangible property following the initial outbound transfer). The U.S. transferor treats the annual inclusion and lump sum as ordinary income and royalties for purposes of determining source and the foreign tax credit limitation category.

On May 3, 2023, Treasury and the IRS published a notice of proposed rulemaking under Section 367 (the “Proposed Regulations”). The Proposed Regulations were intended to address simple, common fact patterns involving repatriations of intangible property by terminating the continued application of Section 367(d) when a transferee foreign corporation repatriates intangible property subject to Section 367(d) to a qualified domestic person when certain reporting requirements are satisfied. The Proposed Regulations also included a rule coordinating the application of Section 367(d) and the provisions in Treasury Regulations Section 1.904-4(f)(2)(vi)(D) that apply the principles of Section 367(d) to determine the appropriate amount of gross income attributable to a foreign branch.

The Final Regulations adopt, without significant modification, the Proposed Regulations. For a further discussion of the proposed regulations, see “IP Phone Home – IRS Issues New Proposed Rules on the Repatriation of Intangible Property” posted on the Weil Tax Blog on May 4, 2023.

Final Regulations.

As indicated above, the Final Regulations adopted the Proposed Regulations with only minor changes. In addition to a clarification to one example, the Proposed Regulations clarify one aspect of the reporting rules.

As a condition for terminating the application of Section 367(d) with respect to repatriated intangible property, the Proposed Regulations would have required a U.S. transferor to provide the information described in Proposed Treasury Regulations Section 1.6038B-1(d)(2)(iv). If a U.S. transferor failed to provide that information, the requirement to take an annual inclusion into account over the useful life of the intangible property, continued to apply. However, a U.S. transferor was eligible for relief under the Proposed Regulations if the Proposed Regulations would have applied to the subsequent transfer of intangible property but for the fact that the required information was not provided and the U.S. transferor, upon becoming aware of the failure, promptly provided the required information, explained its failure to comply, and met certain other requirements (if applicable).

One comment to the Proposed Regulations requested that the Final Regulations clarify whether relief for a failure to comply is, in relevant part, also conditioned on the U.S. transferor timely filing one or more amended returns for the taxable year in which the subsequent transfer occurred and succeeding years, and, if the U.S. transferor is under examination when an amended return is filed, providing a copy of the amended return(s) to the IRS personnel conducting the examination. Treasury and the IRS adopted that comment in the Final Regulations to clarify that the relief for a failure to comply is conditioned upon the requirements listed in the previous sentence (if applicable).

Applicability Date.

Consistent with the applicability date in the Proposed Regulations, the Final Regulations apply only to repatriations of intangible property occurring on or after the date the final regulations are published in the Federal Register, which is scheduled to be October 10, 2024.

[1] Unless otherwise indicated, all references in this article to “Section” are to the Code, and all references to “Treasury Regulations Section” are to the U.S. Treasury Department Regulations (i.e., the Treasury Regulations) promulgated under the Code.