2024 Final Regulations on Section 367(d)

On October 10, 2024, the IRS issued final regulations that significantly shifted how intangible property (I.P.) transfers are taxed under IRC Section 367(d). These regulations build on the proposed rules from May 2023 and bring long-awaited clarity and relief to U.S. taxpayers looking to repatriate I.P. from foreign affiliates. The changes aim to simplify tax obligations for businesses involved in cross-border transactions, particularly those managing global intangible assets.

Background: Section 367(d) and Outbound IP Transfers

IRC Section 367(d) aimed to prevent U.S. companies from avoiding taxes by transferring I.P. to foreign affiliates in tax-free exchanges under IRC Section 351 or 361. Without the provisions of 367(d), these transfers had the potential to defer income on expatriated I.P. To mitigate this deferral potential, under 367(d), a U.S. transferor must recognize a deemed sale of the I.P.  in exchange for a continuing deemed annual royalty. The deemed royalty is characterized as ordinary income over the useful life of the property, not to exceed 20 years. Further, since the deemed royalty is characterized as U.S. source income under Treas. Reg. § 1.367(d)-1(c)(3), taxpayers are generally unable to claim a foreign tax credit for any foreign taxes paid on the income derived from the transferred I.P., potentially resulting in double taxation. However, if the I.P. was repatriated (either to the original transferor or to another related U.S. person), Section 367(d) continued to impose the same annual inclusions, creating a tax disincentive for the I.P. repatriation.

Final Regulations: Incentive to Repatriate

The final regulations, which largely adopt the proposed rules from May 2023, terminate the application of Section 367(d) when I.P. is repatriated when certain conditions are met. The I.P. must be repatriated to a “qualified domestic person” (QDP) to qualify. A QDP is one of the following:

• The original U.S. transferor of the I.P.
• A successor U.S. transferor subject to U.S. taxation
• A related U.S. person subject to U.S. taxation ensures that all income derived from the repatriated I.P. is taxed in the U.S.

The final regulations exclude certain entities, such as a regulated investment company, a real estate investment trust, a DISC, or an S corporation from being considered a qualified domestic person. Partnerships are not considered qualified domestic persons to terminate Section 367(d) provisions, even if all of the partnership’s owners would be qualified domestic persons. These exclusions are intended to eliminate potential tax avoidance. In summary, the final regulations retain some important elements from the proposed regulations, including:

• Termination of Section 367(d) on Repatriation

When a foreign corporation repatriates previously transferred I.P. to a QDP, the U.S. transferor is no longer required to continue annual inclusions under Section 367(d).

• Avoidance of Double Taxation

The regulations clarify how to adjust the basis of repatriated I.P. to prevent double taxation or gain recognition. The basis of the repatriated I.P. in the hands of the QDP is adjusted based on the transferor’s original basis, and the gain is recognized upon repatriation (if any).

• Reporting Requirements

The regulations emphasize the importance of adhering to reporting obligations with penalties for failure to meet these requirements.

Practical Implications for Taxpayers

With the termination of Section 367(d) for qualified repatriations, businesses can bring I.P. back to the U.S. without the burden of continued deemed royalties. U.S. businesses that had previously expatriated I.P. have more flexibility with their global I.P. footprint.

Effective Date and Future Considerations

These final regulations are effective as of October 10, 2024.  They apply to transfers and repatriations of I.P. on or after this date. While the rules provide relief for future transactions, companies that transferred I.P. in prior years must carefully consider whether repatriation now makes sense, given the new landscape.

Conclusion

The final regulations under Section 367(d) may simplify tax obligations for U.S.-based taxpayers that previously offshored IP. By terminating the continued application of Section 367(d) for qualifying repatriation, the IRS has opened the door for U.S. companies to realign their global I.P. footprint without the continued burden of U.S. taxation. However, taxpayers must navigate the details carefully and ensure compliance with reporting requirements to benefit from these changes. We recommend that U.S. taxpayers reevaluate their I.P. footprint in light of these revised regulations.

Reach out to our Global Business Services team with any questions regarding these requirements or any other international tax issue.