IRS Announces Transition Period for Extension Covering Taxation of Royalties on Foreign Intellectual Property

On April 3, the IRS released Notice 2023-31, detailing that when proposed regulations under Section 903 are codified, the IRS and the U.S. Treasury Department intend to extend the transition period for the single-country exceptions documentation requirement. This extension will push the end of the transition period from May 17, 2023, to 180 days after the proposed regulations are finalized.

Section 903, established in 1994, allows for a credit on foreign taxes in lieu of generally imposed foreign income war profits or excess profits tax liability in the U.S. for foreign withholding taxes on the Receipt of Royalties to qualify, they must pass a “source-based attribution requirement.”

Per the proposed regulations, one of the qualifiers for the source-based attribution requirement is the single-country exception. The single-country exception may apply if:

1) the tested income qualifying for the foreign tax credit is characterized as royalty income under the foreign tax law, and

2) the payment giving rise to such income is made pursuant to a single-country license.

As the proposed regulations have not yet been finalized and realizing the desire for an orderly implementation of requirements to qualify for this exception, the Treasury Department and IRS plan on modifying the transition documentation rule to grant taxpayers a longer period to provide the required agreement. As it currently stands, there will be 180 days following the filing date of these proposed regulations for taxpayers to execute the necessary documentation.

Navigating proposed regulations, especially around the Foreign Tax Credit, can be intimidating. If you have any questions about global business or tax compliance issues, please do not hesitate to reach out to McGuire Sponsel’s Global Business Services team.