The IRS issued final regs that affect U.S. taxpayers who transfer property to foreign corporations in nonrecognition transactions.
The regs are aimed at preventing taxpayers from avoiding recognition of gains or income attributable to high-value intangible property by claiming that a large share of the transferred property’s value is foreign goodwill or going concern value.
The regulations contain the following changes to Section 367 of the Internal Revenue Code. They:
- Eliminate the favorable treatment of goodwill and going concern value by narrowing the scope of the active trade or business exception and eliminating the exception that provides that foreign goodwill and going concern value are not subject to the immediate gain recognition.
- Allow taxpayers to apply the deemed royalty regime to certain property that would otherwise be subject to the immediate gain recognition for outbound transfers of intangibles including goodwill and going concern.
- Require generally deemed royalties to be included during the entire useful life of the transferred property, but permit US transferors to elect to instead include such amounts during the 20-year period beginning in the first tax year in which an inclusion is required. Taxpayers making this election must increase their projected income inclusions to recognize the entire present value of the transferred property during the 20-year period.
- Remove the exception that permits certain property denominated in a foreign currency to qualify for the active trade or business exception.
The rules include a retroactive effective date for transfers on or after September 14, 2015.