Treasury issues proposed regulations addressing repatriation of intangible property

Many U.S. companies have transferred intangible property (IP) to an affiliated foreign corporation. Some companies have repatriated that IP (transferred it back to the U.S.), and others may be considering doing so. These types of IP transfers are addressed in proposed regulations that the Internal Revenue Service and U.S. Treasury Department issued on May 2, 2023 (the “Proposed Regs”).

Internal Revenue Code (IRC) Section 367(d), and the regulations thereunder (“Section 367(d) Regs”), generally apply when a U.S. person transfers IP to a foreign corporation in an otherwise tax-free exchange. The Proposed Regs address the application of IRC Section 367(d) when a transferee foreign corporation subsequently repatriates the IP in question to a U.S. person.

The Section 367(d) Regs currently stipulate that if a U.S. transferor transfers any IP to a foreign corporation in an IRC Section 351 or IRC Section 361 exchange (i.e., certain qualifying contributions to capital or transfers incident to a reorganization), the U.S. transferor is treated as having sold the IP in exchange for payment(s) reflecting the arm’s-length value of the disposition. The deemed payment(s) associated with the sale must remunerate the U.S. transferor for any income earned from the use of the IP by the foreign corporation over the IP’s economic useful life. The Section 367(d) Regs refer to IRC Section 482 and the regulations thereunder (the transfer pricing rules) for purposes of valuing this income stream.

As currently written, the Section 367(d) Regs do not contemplate a subsequent repatriation of the IP and, as such, do not address the termination of the income inclusion rules for the deemed payment(s) subsequent to any U.S. repatriation. This can result in a double inclusion of income in the U.S. tax base for income associated with the IP.

The Proposed Regs aim to prevent this double inclusion of income. They would terminate the application of IRC Section 367(d) to a prior transfer of IP if the transferee foreign corporation repatriates the IP to a “qualified domestic person,” and meets other requirements, including certain reporting. The Proposed Regs would also clarify certain tax effects of deemed payments under IRC Section 367(d) in situations where the transferred IP is not repatriated.

Questions?

Baker Tilly can help address any questions you might have about the new Proposed Regs or their applicability to your particular IRC Section 367(d) transaction.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.