The U.S. Treasury released final regulations for Section 367(d) on October 9, 2024, providing guidance on the treatment of previously expatriated intangible property where the transfer was subject to Section 367(d) and subsequently repatriated back to the United States. The final regulations apply to IP repatriations occurring on or after October 10, 2024.
The Section 367(d) rules related to outbound transfers of intangibles to foreign corporations deem that the intangible was transferred in exchange for an annual royalty for the useful life of the property, not to exceed 20 years. This deemed royalty is additional taxable income to the U.S. transferor of the intangible. Generally, the deemed annual royalty amount must be commensurate with income produced by the intangible property in accordance with transfer pricing principles.
The prior regulations provided limited guidance on the impact of repatriating intangible property back to the United States, specifically the impact on the deemed royalty if the IP is subsequently repatriated back to the United States within the 20-year window. Under the prior regulations, intangibles that were previously transferred to a foreign corporation and subject to on-going annual royalty inclusions under Section 367(d) would continue to be subject to the annual royalty inclusion even when the intangible is subsequently repatriated back to a U.S. transferee. This would result in excessive taxation and prevent taxpayers from repatriating intangibles back into the United States.
The final regulations generally follow the proposed regulations and provide guidance that would terminate the continued application of the deemed royalty from the repatriated intangible property when the intangible is repatriated back to a “qualified domestic person” (such as the U.S. transferor or a party related to the U.S. transferor) where the income from the intangible would once again be subject to U.S. federal income tax. In addition, upon repatriation, the original U.S. transferor of the intangible property may be required to recognize gain.
These regulations may provide an incentive for multinational companies who previously expatriated IP to repatriate that IP to extinguish the on-going 367(d) deemed royalty.
Author: Calvin Yung | [email protected]
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