IRS and Treasury Issue Proposed Regulations on Rules for Repatriation of Intangible Property
The IRS and the U.S. Department of the Treasury recently issued proposed regulations REG-124064-19 regarding rules for certain repatriations of intangible property.
The proposed regulations would, in certain cases, terminate the continued application of certain tax provisions arising from a previous transfer of intangible property to a foreign corporation when the intangible property is repatriated to certain U.S. persons. The regulations would impact certain U.S. persons who previously transferred intangible property to a foreign corporation.
Sec. 367(d) of the Internal Revenue Code provides rules for outbound transfers of intangible property by a U.S. person to a foreign corporation. 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 matter of a direct or indirect disposition of the intangible property following the transfer, at the time of the disposition.
Sec. 367(d) does not differentiate between subsequent transfers of intangible property made to a related U.S. or foreign person. Because of this, the IRS stated that 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.” Consequently, 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.
Additionally, the proposed regulations discuss in what way the principles of Sec. 367(d) and the Sec. 904(d) foreign branch income rules apply in concluding the amount of gross income attributable to a foreign branch that is required to 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 attributable to a foreign branch that must be adjusted under Regs. Sec. 1.904-4(f)(2)(vi)(D). But those provisions do not elaborate on how the principles of Sec. 367(d) apply for that purpose. In particular, the IRS stated, there is no mention of how or whether current Regs. Sec. 1.367(d)-1T(f) applies in the foreign branch income context. The Treasury and IRS believe that due to the differing scopes and purposes of Sec. 367(d) and Regs. Sec. 1.904-4(f)(2)(vi)(D), 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. Therefore, 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.