The IRS has released proposed regulations (REG-124046-19) that would terminate the continued application of Section 367(d) if the applicable intangible property (IP) is repatriated to certain U.S. persons that are subject to U.S. taxation with respect to the income derived from the IP.
Section 367(d) applies when a U.S. person transfers IP to a foreign corporation in an exchange under Sections 351 or 361. The U.S. person is generally treated as having sold the IP in exchange for deemed annual payments that are contingent on the productivity, use, or disposition of the IP, and that are commensurate with the income attributable to the IP.
The new proposed regulations would apply to the repatriation of IP by a transferee foreign corporation to a qualified domestic person, which is defined as the U.S. transferor that initially transferred the IP (an “initial U.S. transferor”), a qualified successor of the initial U.S. transferor (a “qualified successor”), or an individual or qualified corporation related to the initial U.S. transferor or successor. In certain cases, the proposed regulations would generally operate to turn off the deemed annual payment rules when IP that was previously transferred to a foreign corporation is transferred back to a qualified domestic person. The proposed rules also provide guidance on the determination of the gain recognition for the U.S. transferor and the qualified domestic person’s basis in the repatriated IP.
The regulations are proposed to apply to a subsequent disposition of IP occurring on or after the date the regulations are finalized. Taxpayers considering transactions involving a repatriation of IP which is currently subject to Section 367(d) should consider the potential implication of the proposed regulations.
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