367 Regulations

If your company is setting up a new foreign corporation or has a foreign branch that it is incorporating, the following rules will likely impact your tax situation.

The U.S. Department of the Treasury and the IRS have recently issued final regulations (December 16, 2016) related to the tax rules covering the establishment of foreign operations. If your company is setting up a new foreign corporation or has a foreign branch that it is incorporating, these new rules will likely effect your tax situation.

Section 367 regulations now require (effective for transfers on or after September 14, 2015) different tax treatment for certain transfers by U.S. taxpayers to foreign entities. Essentially, the new regulations narrow the type of property subject to the “active trade or business” exception under Section 367, and eliminate the exception for transfers of foreign goodwill or going concern value, which often included a company name given to a new foreign entity.

The IRS and Treasury has also issued regulations related to Section 482 that apply to two or more interrelated and controlled transactions involving two or more provisions of the Internal Revenue Code. These regulations change how bundles of intangible assets that are transferred to a related foreign corporation are valued.

In plainer English, these changes will create taxable income for U.S. taxpayers in situations that were formerly tax exempt. They will require more extensive valuation of foreign transfers and more exacting documentation of the nature of the transfers.

The final regulations resulted in five substantive changes from the 1986 temporary regulations:

  1. They eliminated the favorable treatment for foreign goodwill and going concern value by narrowing the scope of the active trade or business (ATB) exception;

  2. They allow taxpayers to apply the rules of Sec. 367(d) (annual royalty type payments) to certain property that otherwise would be subject to Sec. 367(a) treatment (immediate sale/gain treatment);

  3. It eliminated the twenty-year limitation on the useful life of intangibles in determining the value of the transfer;

  4. It eliminated the exception that permitted certain property denominated in a foreign currency to qualify for the ATB exception; and

  5. Changed the valuation rules to better coordinate the regulations under Sections 367 and 482 (including the temporary regulations under Sec. 482 issued with the proposed regulations on September 16, 2015).

Our tax team is fully aware of these finalized regulations and their potential ramifications. We are available to discuss them with you and to help you document your foreign operations today so that you will be prepared for future audits or defense of your tax position on outbound transfers.