IRS Issues Proposed Regulations on Section 367(d) Intangible Property Repatriations

The IRS on May 2 released proposed regulations under Section 367(d) related to certain intangible property repatriation transactions where previously transferred intellectual property (IP) to a foreign corporation currently subject to Section 367(d) are transferred (repatriated) to the U.S. in some types of transactions.  

The changes in the proposed regulations are discussed below.

Section 367(d) and Existing Regulations

Section 367(d) provides rules for the outbound transfer of IP by a U.S. person to a foreign corporation. Under Section 367(d), if a U.S. person transfers IP to a foreign corporation in a Section 351 or Section 361 transaction, the U.S. person is treated as having sold the IP in exchange for payments that are contingent on the productivity, use or disposition of the IP. Income is generally required to be recognized in equal installments over the useful life of the IP. Additionally, the foreign corporation reduces its E&P by the amount of the deemed payment to the U.S. transferor. 

The current Section 367(d) regulations also provide rules in the event of subsequent transfers of the stock of the transferee foreign corporation or if the transferee foreign corporation transfers the IP. Different rules apply if the subsequent transfer is made to a U.S. person or a foreign person and whether the transferee is a related or unrelated person to the U.S. transferor. 

If the original transferee foreign corporation subsequently transfers the IP to a related U.S. person through a repatriation of the intangible property itself, the current Section 367(d) regulations generally do not provide relief from the Section 367(d) inclusion to the original U.S. transferor. This result, coupled with the related U.S. person now also recognizing income from such IP by virtue of its ownership, could cause what the preamble to the proposed regulations refers to as “excessive U.S. taxation.”  Such excessive taxation could be a deterrent to some U.S. corporations repatriating previously transferred IP into the U.S. in certain circumstances. 

Section 367(d) Proposed Regulations

To address the issue identified above, and no longer impede repatriation of IP to the U.S., the IRS released proposed regulations under Section 367(d). Under these regulations, the Section 367(d) inclusion to the original transferor is terminated when an original transferee foreign corporation repatriates intangible property to a qualified domestic person and the original U.S. transferor meets certain filing requirements. A repatriation is defined in the preamble as a subsequent transfer of intangible property to the U.S. transferor or related U.S. person. Prop. Treas. Reg. §1.367(d)-1(f)(4)(iii) defines a qualified domestic person as the U.S. transferor that initially transferred the intangible property subject to Section 367(d) or a qualified successor. 

In addition to the rules above, the proposed regulations require the U.S. transferor to include in its gross income a partial annual Section 367(d) inclusion attributable to the part of the year that the transferee foreign corporation held the intangible property.  Also, different rules will apply under Section 367(d) depending on whether the repatriation event involving the qualified domestic person is wholly or partially taxable or non-taxable. Finally, the proposed Section 367(d) termination rule would not apply for purposes of computing foreign branch income under Section 904(d). 

The proposed regulations apply only to transfers of intangible property that occur on or after the date on which the proposed regulations are finalized. 

How BDO Can Help

The proposed Section 367(d) regulations provide welcome relief to U.S. persons who are considering repatriating previously outbounded intangible property. BDO can help U.S. multinational taxpayers understand the U.S. federal income tax implications of repatriating intangible property, including modeling the relevant tax costs of the various approaches. Although the proposed regulations are not yet effective, U.S. multinationals should begin considering their potential impact and actions needed for tax years 2023 and beyond.