IRS Ends Foreign Goodwill Tax Exception

The US Internal Revenue Service (IRS) has issued a New Regulation removing the foreign goodwill tax exception for transfers to an overseas buyer.

The regulation (TD9739) also limits the type of property eligible for the "going concern" exception to tangible property and financial assets.

Its aim is to counter companies' attempts to avoid tax on the disposal of intangible property by attributing a large part of the property's value to goodwill or going concern value, which are currently tax-free under s367(d) of the Tax Code.

This provision allows a US company that transfers intangible property to a foreign corporation to be treated for tax purposes as having sold it in exchange for arm's-length royalty payments over the property's useful lifetime.

Based upon taxpayer positions that the IRS has encountered in examinations and controversy, the Treasury Department and the IRS are concerned about situations in which controlled groups evaluate economically integrated transactions involving economically integrated contributions, synergies, and interrelated value on a separate basis in a manner that results in a misapplication of the best method rule and fails to reflect an arm's length result.

Taxpayers may assert that, for purposes of section 482, separately evaluating interrelated transactions is appropriate simply because different statutes or regulations apply to the transactions (for example, where section 367 and the regulations thereunder apply to one transaction and the general recognition rules of the Code apply to another related transaction).

These positions are often combined with inappropriately narrow interpretations of § 1.482-4(b)(6), which provides guidance on when an item is considered similar to the other items identified as constituting intangibles for purposes of section 482. The interpretations purport to have the effect, contrary to the arm's length standard, of requiring no compensation for certain value provided in controlled transactions despite the fact that compensation would be paid if the same value were provided in uncontrolled transactions.

These temporary regulations address the aforementioned concerns by clarifying the coordination of the application of section 482 in conjunction with other Code and regulatory provisions in determining the proper tax treatment of controlled transactions.

US companies making offshore disposals on or after September 16, 2015 must now pay tax on the recognized current gain of foreign goodwill included in the disposal. The rule also removes the previous 20-year limit on the useful life of intangible property. The lifetime is now the whole period during which the intangible property is reasonably expected to be exploited.

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