The IRS on Tuesday issued proposed regulations that would in certain cases terminate the continued application of Sec. 367(d) when intangible property is repatriated to certain U.S. persons after being previously transferred to a foreign corporation.
Sec. 367(d) provides rules for outbound transfers of intangible property by a U.S. person to a foreign corporation. Specifically, the U.S. transferor is treated as receiving amounts that reasonably reflect the amounts that would have been received annually in the form of such payments over the useful life of the intangible property or, in the case of a direct or indirect disposition of the intangible property following the transfer, at the time of the disposition.
The IRS noted in the preamble to REG-124064-19 that both it and Treasury are aware that some taxpayers are considering whether to repatriate previously transferred intangible property. The regulations in Sec. 367(d) do not distinguish between subsequent transfers of intangible property made to a related U.S. or foreign person, so there is a concern that, in certain cases, the Sec. 367(d) regulations "can inappropriately require the U.S. transferor to continue recognizing an annual section 367(d) inclusion even if the subsequent transfer is to a related U.S. person that will recognize the income derived from the intangible property," the IRS said.
Continuing to apply Sec. 367(d) in these situations "could result in excessive U.S. taxation and may disincentivize certain repatriations of intangible property," according to the IRS. Thus, the proposed regulations would, in certain cases, terminate the continued application of Sec. 367(d) if intangible property is repatriated to certain U.S. persons that are subject to U.S. taxation with respect to the income derived from the intangible property.
The proposed regulations also address how the principles of Sec. 367(d) and the Sec. 904(d) foreign branch income rules apply for determining the amount of gross income that is attributable to a foreign branch that must be adjusted under Regs. Sec. 1.904-4(f)(2)(vi)(D).
Regs. Sec. 1.904-4(f)(2)(vi)(D) provides that, in relevant part, the principles of Sec. 367(d) apply for determining the amount of gross income that is attributable to a foreign branch that must be adjusted under Regs. Sec. 1.904-4(f)(2)(vi)(D).
However, the IRS believes the consequences of a subsequent transfer for purposes of determining a U.S. transferor's Sec. 367(d) inclusion do not necessarily inform the appropriate treatment for purposes of the Sec. 904(d) branch income rules. Accordingly, the proposed regulations provide that each successive transfer to which Regs. Sec. 1.904-4(f)(2)(vi)(D) applies is considered independently from any other preceding or subsequent transfers.
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