On October 10, 2024, the Department of the Treasury and IRS finalized regulations under Section 367(d) of the Internal Revenue Code. These regulations clarify the tax implications of transferring intangible property (IP) back from foreign corporations to certain U.S. persons. They terminate the continued application of certain tax provisions for U.S. transferors of the intangible property when transferred back to a “qualified domestic person.” These final rules are significant for U.S. multinational corporations and individuals engaged in cross-border transfers of intangible assets.

Background on Section 367(d)

Section 367(d) concerns transfers of intangible property to foreign corporations. It treats such transfers as if the U.S. person continued to own the property, requiring the U.S. transferor to include an annual deemed royalty over the property’s useful life in its income. When the intangible property is transferred, the rules determine how these continued royalty inclusions will terminate, focusing on certain conditions that must be met.

Key Provisions in the Final Regulations

1. Qualified Domestic Person:

   The final regulations require that the recipient of transferred intangible property be a “qualified domestic person” to terminate the application of Section 367(d). The definition includes individuals and certain U.S. corporations related to the original U.S. transferor. However, partnerships and S corporations are excluded from this classification due to concerns that partnership allocations and changes in ownership could frustrate the regulations’ purposes. Despite comments suggesting their inclusion, the final rules retained the exclusion to ensure administrative and compliance simplicity.

2. Treatment of Partnerships and S Corporations:

   The Treasury and IRS explicitly rejected comments suggesting the inclusion of domestic partnerships as qualified domestic persons. The rationale was that partnerships may change ownership or economic rights in ways that could lead to noncompliance with the intended termination of Section 367(d) inclusions. Similarly, S corporations were excluded due to the potential tax-exempt status of certain shareholders (e.g., Employee Stock Ownership Plans or ESOPs), which would prevent full taxation of the repatriated income.

3. Basis Adjustments for Repatriated Intangible Property:

   The regulations clarify the rules around adjusted basis in intangible property that is repatriated. When a qualified domestic person receives intangible property, its adjusted basis may be subject to adjustments based on gain recognition rules. The Treasury determined that a broader review of basis rules for Section 367(d) issues is warranted, so any additional changes to these rules will be handled in future rulemaking.

4. Deduction for Annual Section 367(d) Inclusions:

   A notable clarification was made regarding how deductions for deemed annual payments by the transferee foreign corporation are allocated. The final regulations maintain that deductions must be allocated to the appropriate classes of gross income, which could include subpart F income, global intangible low-taxed income (GILTI), or other income types, depending on the foreign corporation’s activities. The suggestion to make these deductions generally available (e.g., under Section 162) was not adopted, as it would contradict the statutory framework.

5. Multiple Transfers Before Repatriation:

   The final regulations address situations where intangible property may be transferred among related foreign corporations before repatriation. Each successive transfer must be evaluated independently, and prior transfers are not considered terminated by subsequent ones. The regulations note potential tax liabilities arising under separate provisions such as Section 951A, leading to complex interactions when IP is transferred between multiple foreign entities. However, the Treasury opted not to modify the regulations to accommodate these complexities, citing that they are beyond the scope of the current rulemaking.

6. Reporting Requirements and Compliance Relief:

   U.S. transferors must provide specific information to terminate the continued application of Section 367(d) under the repatriation rules. The regulations also provide relief for transferors who fail to comply with these reporting obligations, allowing them to cure defects if they promptly provide the required information and explanations. However, this relief is contingent on filing amended returns and notifying the IRS of any failures, especially if under examination.

Impact on U.S. Multinationals

The final regulations aim to simplify and clarify the termination of Section 367(d) tax inclusions upon the repatriation of intangible property. By defining who qualifies as a qualified domestic person and setting out clear reporting and compliance requirements, these rules bring much-needed guidance to U.S. multinationals engaged in cross-border transactions involving intangible property.

For U.S. corporations with substantial IP holdings abroad, these regulations are critical in managing the tax implications of repatriation. Compliance teams must ensure that the proper reporting procedures are followed, particularly regarding the required documentation and filing amendments in cases of errors. Additionally, companies should reassess their transfer strategies, especially if partnerships or S corporations are involved, to avoid unintended tax consequences.

Future Considerations

The Treasury Department and IRS have indicated that some issues, particularly around the treatment of basis adjustments and broader Section 367(d) issues related to partnerships, will be revisited in future rulemaking. Companies should stay informed of these potential developments as further regulatory adjustments could impact the treatment of transferred intangible property and cross-border tax strategies.

Conclusion

The final Section 367(d) regulations provide essential clarity and structure for U.S. persons repatriating intangible property from foreign corporations. By defining key terms, setting out reporting obligations, and clarifying the termination of annual inclusions, the regulations help U.S. multinationals manage their tax liabilities more effectively. However, companies must remain vigilant in their compliance efforts, particularly concerning the complexities of multi-entity transactions and future developments in related rulemaking.