United States

Treasury finalizes regulations relating to foreign goodwill

Final regulations tax outbound transfer of foreign goodwill

TAX ALERT  | 

Under special provisions of IRS regulations, the transfer of goodwill and going concern value associated with a foreign branch operation were not taxable upon the incorporation of the branch. However, Treasury and the IRS have issued final regulations pursuant to Internal Revenue Code that (1) eliminate the favorable treatment of foreign goodwill and going concern value that existed under prior long-standing regulations, and that (2) generally limit the scope of the exception to the rule that requires taxpayers to recognize gain on the incorporation of a foreign branch if the assets of the branch are used in an active business post-incorporation. The final regulations codify previously issued proposed regulations on this point but allow taxpayers to elect to treat the transfer of foreign goodwill or going concern value as a sale in exchange for a ’deemed’ royalty. This election must be disclosed on the taxpayer’s return. These rules will affect taxpayers who transfer a foreign operating business to a foreign corporation, or who elect under special rules to treat a ‘disregarded’ foreign entity as a corporation for U.S. tax purposes where a foreign business operation is conducted through that disregarded entity.

What about these final regulations?

Under the proposed regulations, taxpayers that transfer intangible property subject to the deemed royalty rules had to take into account income during the entire useful life of the property, which was a significant change to then existing law that required taxpayers to use a maximum 20-year useful life. The final regulations provide an election to use the original 20-year limitation with respect to intangible property with a useful life that is indefinite or reasonably anticipated to exceed 20 years. However, taxpayers who make this election must include amounts that reasonably reflect amount that, had the limitation not been elected, would be required to be included over the useful life of the transferred property following the end of the 20-year period. This rule generally forces taxpayers to take into account the full present value of an intangible even though deemed payments only need be included for 20 years.   

Effective/applicability dates

Effective/applicability dates of the final regulations relate back to the proposed regulations. The final regulations generally apply to transfers:

  • Occurring on or after Sept. 14, 2015
  • Occurring before that date resulting from entity classification elections filed on or after Sept. 14, 2015

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