The U.S. Treasury released proposed regulations for Section 367(d) on May 2, 2023, providing guidance on the treatment of intangible property that was previously transferred to a foreign company and subsequently repatriated back to the United States – specifically, property that was subject to the rules of Section 367(d) upon expatriation. These proposed regulations would apply to subsequent transfers of previously outbound intangible property on the date when the regulations are finalized.
At a high level, the Section 367(d) rules related to outbound transfers of intangibles to foreign corporations deem that the intangible was transferred in exchange for an annual royalty for the useful life of the property, not to exceed 20 years. This deemed royalty is additional taxable income to the U.S. transferor of the intangible. Generally, the deemed annual royalty amount must be commensurate with income produced by the intangible property in accordance with transfer pricing principles.
The current regulations provide limited guidance on the impact of repatriating intangible property back to the United States, specifically what happens to the deemed royalty income if the subsequent transfer back is within the 20-year window. Under the current regulations, intangibles that were previously transferred to a foreign corporation and subject to ongoing annual royalty inclusions under Section 367(d) would continue to be subject to the annual royalty inclusion even where the intangible is subsequently transferred back to a U.S. transferee. This could result in excessive taxation and inhibit taxpayers from repatriating intangibles back into the United States.
The proposed regulations provide guidance that would terminate the application of the continuing deemed royalty from the intangible property that was previously transferred to a foreign corporation when the intangible is repatriated back to a “qualified domestic person” (such as the U.S. transferor or a party related to the U.S. transferor) where the income from the intangible would once again be subject to U.S. taxation. In addition, the proposed regulations provide reporting requirements to disclose certain information regarding the subsequent transfer of intangible property.