Recently, the IRS proposed regulations that could eliminate an important planning opportunity currently available in outbound transfers of foreign goodwill. Under the IRS’s proposed regulations, an outbound transfer will not be example of gain recognition under Section 367. These proposed regulations will shift the government’s application of the law allowing them to tax outbound transfers of foreign goodwill.
The proposed regulations would amend the exception for property transferred for use in the active conduct of a trade or business outside the US. Such transfers would be:
- Subject to immediate tax under section 367a and the regulations stated there; or
- At the election of the taxpayer subject to tax over it’s useful life under section 367d
Previously useful life was limited to 20 years. Under the new proposed regulations, the limit would not exist. Currently, outbound transfers of intangible property are subject to be taxed at the election of the taxpayer over its useful life. As a result, taxpayers of asserted that outbound transfers of foreign and going concern value are not subject to the rules of 367d and instead should be subject to Section 367a. They then argue that foreign goodwill is exempt from the intangibles rules from the ATOB exception in Section 367a.
The taxpayer interpretations of the regulations have raised some alarm with the IRS. According to them, the current situation “raise(s) significant policy concerns and are inconsistent with the expectation, expressed in legislative history, that the transfer of foreign goodwill or going concern value developed by a foreign branch to a foreign corporation was unlikely to result in abuse of the U.S. tax system.”
Proposed Amendments to Section 367
Under the new proposed regulations, the IRS has amended the ATOB exception to clearly address transfers of foreign goodwill and going concern values so that such transfer would be:
- Subject to immediate tax under Section 367a; or
- At the election of the taxpayer subject to its useful life.
The ATOB exception has bene modified to provide an exclusive list of property eligible for the exception. The new list of properties eligible for the ATOB exception include:
- Tangible property
- Working interesting in oil and gas property
- Financial assets that are transferable for use by foreign corporations in active trade or business
For more information on how these new regulations could affect your company, contact an experienced tax attorney from Castro & Co. We focus exclusively on international taxation, representing clients worldwide.