In Notice 2012-39 (the “Notice”), the IRS issued guidance announcing its intention to issue regulations with respect to certain transfers of intangible property by a U.S. corporation to a foreign corporation in a reorganization described in section 361 of the Internal Revenue Code (the “Code”), citing significant policy concerns involving certain intellectual property transfers that permit U.S. persons to repatriate earnings without U.S. income taxation. The IRS’ position in the Notice will impact repatriation planning strategies.
Subject to certain exceptions, under section 367(a), a U.S. person is taxed on income or gain attributable to the transfer of property to a foreign corporation in an exchange described in sections 332, 351, 354, 356, or 361. (One of the major exceptions is for transfers of foreign goodwill.) Section 367(d) treats the transfer of intangible property (within the meaning of section 936(h)(3)(B)) as a sale in exchange for payments that are contingent upon the productivity, use or disposition of such property, stating that section 367(a) shall not apply. Section 367(d)(2)(A) and the related temporary regulations provide that a U.S. transferor shall, over the useful life of the property, annually include in gross income an amount that represents an appropriate arm’s length charge for the use of the property as determined under section 482 principles. If a U.S. person is required to recognize income, and the amount deemed to be received is not actually paid by the transferee foreign corporation, then the U.S. person may establish an account receivable from the transferee foreign corporation equal to the amount deemed paid that was not actually paid. If a U.S. transferor subsequently disposes of the stock of the transferee foreign corporation to a person that is not a related person, the U.S. transferor is treated as having simultaneously sold the intangible property to the unrelated person acquiring the stock of the transferee foreign corporation. The U.S. transferor must recognize gain (but not loss) in an amount equal to the difference between the fair market value of the transferred intangible property on the date of the subsequent disposition and the U.S. transferor’s adjusted basis in that property on the date of the initial section 367(d) transfer. If a U.S. transferor subsequently disposes of the stock of the transferee foreign corporation to a U.S. person that is a related person, the related U.S. person, over the useful life of the property, annually includes in gross income a proportionate share of the contingent annual payments that would otherwise be deemed to be received by the U.S. transferor.
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