Outbound Intangible Transfer Proposed Regulations

On Tuesday, May 2, the IRS issued proposed regulations that would terminate the application of the outbound transfer of intangible property rules in certain circumstances under the Code, Section 367(d). These proposed regulations would affect certain U.S. persons that previously transferred intangible property to a foreign corporation.

The rules in Section 367(d) were developed to deal with situations in which a U.S. company tries to reduce its U.S. taxable income by deducting research and experimentation expenses incurred to develop an intangible and then transferring that intangible to a foreign corporation to defer U.S. tax on the profits generated by the intangible. Furthermore, under the current rules, the U.S. transferor is treated as having an “annual inclusion” that is annual income over the useful life of the transferred intangible or a “lump-sum” inclusion when the intangible is disposed of after the transfer.

The proposed regulations would terminate the continued application of Section 367(d) transfer rules when a foreign corporation transferee transfers intangible property to a qualified domestic person (e.g., U.S. corporation or individual associated with the U.S. transferor) and the original U.S. transferor reports certain information about the transfer to the IRS. When these requirements are met, the proposed rules would require the U.S. transferor to report as income a partial annual inclusion (for the part of the tax year that the transferee foreign corporation held the intangible). 

After reporting this partial annual inclusion and recognizing potential gain from the repatriation, the intangible would no longer be subject to the required income inclusion rules. In addition, the proposed regulations provide a special rule to determine the qualified domestic person’s basis in the repatriated intangible, ensuring that a qualified domestic person doesn’t receive a tax-free increase to the adjusted basis of the repatriated intangible. 

The IRS is requesting comments and requests for a public hearing, which must be summited by July 5, 2023. While these proposed regulations aren’t in effect, their potential impact to U.S. multinational companies is significant. 

Please reach out to McGuire Sponsel’s Global Business Services Practice to discuss the potential impact to your organization in more detail.