Proposed Regulations Addressing the Classification of Cloud and Other Digital Content Transactions


This month the United States Treasury Department and Internal Revenue Service issued proposed regulations to clarify the treatment of transactions involving cloud computing and other digital content.

The current regulations, finalized in 1998 (before the growth of electronic commerce), address only the classification of transactions involving computer programs and do not explicitly address the treatment of transactions involving cloud computing and other digital content (e.g., streaming music and video and mobile device applications). Under the current regulations, most software transactions are treated as either sales of copyrighted articles or licenses of copyright rights. However, most cloud transactions do not generally involve the transfer of a copyrighted article or copyright rights.

The proposed regulations modify and expand on the current regulations by adding rules for classifying cloud transactions and other transactions involving digital content. A “cloud transaction” is defined as a transaction through which a person obtains non-de minimus on-demand network access to computer hardware, digital content, or other similar resources and does not include network access to downloaded digital content for storage or use on a person’s computer or other electronic device. Under the proposed regulations, cloud transactions will be treated as either a provision of services or a lease of property. It is important to note that the proposed regulations would not apply to transactions already addressed in the current regulations. Additionally, the proposed regulations modify the references to computer programs in the current regulations by replacing them with references to “digital content”.

The classification of a cloud transaction as a service or lease will be a fact sensitive analysis based on factors listed in the proposed regulations. The proposed regulations include a number of examples which illustrate the treatment of certain cloud transactions.

The proposed regulations also apply to the international provisions of the Internal Revenue Code enacted by the Tax Cuts and Jobs Act (Sections 59A, 245A, 250 and 267A) for classifying transactions and sourcing income.

The regulations are proposed to be effective for tax years beginning on or after the date the U.S. Treasury adopts and publishes the final regulations in the Federal Register.

To find out how these regulations impact your business, please reach out to our International Tax Team.

Author: Calvin Yung, JD, LLM | [email protected]


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