Exploitation of Intangible Property Rights Abroad: The Tax Incentives to Licensing under FDII

Exploitation of Intangible Property Rights Abroad: The Tax Incentives to Licensing under FDII

Tax Law
By Anthony Diosdi A U.S. corporation’s lease or licensing of property and license of intellectual property to non-U.S. customers may be subject to U.S. federal tax at a rate of only 13.125 percent. This reduced tax rate can apply to cross-border licenses of software, apps, streaming of audio or video, and proprietary knowhow that is essentially secret or confidential information not known to the public. This article explains the general framework for the Foreign Derived Intangible Income (“FDII”) deductions available to U.S. corporations that license intellectual property to non-U.S. entities or persons and foreign tax considerations associated with cross-border licensing agreements. Tax Incentives to Cross-Border Licensing Tax considerations often create major incentives for licensing of intangible rights to unaffiliated and foreign affiliates controlled by the licensor as a result of…
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The Rules Governing Cross-Border Intercompany Transfer Pricing of Intangible Property for Multinational Corporations

The Rules Governing Cross-Border Intercompany Transfer Pricing of Intangible Property for Multinational Corporations

Tax Law
By Anthony Diosdi Multinational corporations usually engage in a variety of cross-border intercompany transactions. A common arrangement is for a U.S. parent corporation to license its intangibles to a foreign subsidiary for exploitation abroad. When such a transfer takes place, a “transfer price” must be computed in order to satisfy various financial reporting, tax, and other regulatory requirements. Internal Revenue Code Section 482 governs the transfer pricing rules and provides that multinational corporations must allocate their worldwide profits among the various countries in which they operate. To this end, Section 482 and its regulations adopt an arm’s-length standard for evaluating the appropriateness of a transfer price. To arrive at an arm’s-length result, a multinational corporation must select and apply the method that provides the most reliable estimate of an arm’s-length…
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Cross-Border Intercompany Transfers of Intangible Property and Cost Sharing Arrangement Considerations for Multinationals

Cross-Border Intercompany Transfers of Intangible Property and Cost Sharing Arrangement Considerations for Multinationals

Tax Law
By Anthony Diosdi Multinational corporations usually engage in a variety of cross-border intercompany transactions. A common arrangement is for a U.S. parent corporation to license its intangibles to a foreign subsidiary for exploitation abroad. When such a transfer takes place, a “transfer price” must be computed in order to satisfy various financial reporting, tax, and other regulatory requirements. Internal Revenue Code Section 482 governs the transfer pricing rules and provides that multinational corporations must allocate their worldwide profits among the various countries in which they operate. To this end, Section 482 and its regulations adopt an arm’s-length standard for evaluating the appropriateness of a transfer price. To arrive at an arm’s-length result, a multinational corporation must select and apply the method that provides the most reliable estimate of an arm’s-length…
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An Overview of the Expatriation Tax and the New Federal Inheritance Tax

An Overview of the Expatriation Tax and the New Federal Inheritance Tax

Tax Law
By Anthony Diosdi Historically, an individual who relinquished his or her U.S. citizenship with “a principal purpose of avoiding U.S. taxes” was subject to a special U.S. income, gift and estate tax for a period of 10 years after the expatriation. When applicable, the expatriate remained subject to U.S. tax on his or her U.S. source income at rates applicable to U.S. citizens and the expatriate could be subject to gift taxes in certain circumstances. In 1996, the Internal Revenue Code substantially expanded the expatriation tax to not only include expatriating U.S. citizens but to certain long-term residents (those having U.S. permanent resident status in 8 of the 15 years preceding termination of residency). Expatriates were also subject to U.S. estate and gift tax during the subsequent ten year period.…
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An Overview of FIRPTA Withholding and a Discussion How to Avoid FIRPTA Withholding on a 1031 Exchange

An Overview of FIRPTA Withholding and a Discussion How to Avoid FIRPTA Withholding on a 1031 Exchange

Tax Law
By Anthony Diosdi U.S. real estate has become a popular investment with foreigners. However, few foreign investors fail to consider the U.S. tax implications of holding U.S. real property. There are significant income, gift and estate tax consequences that may result when U.S. real property is sold or transferred. This article discusses the withholding requirements of the Foreign Investment in Real Property Tax Act of 1980 (or “FIRPTA”) and how the FIRPTA withholdings may be reduced or eliminated. Under FIRPTA, gains or losses realized by foreign corporations or nonresident alien individuals from any sale, exchange, or other dispositions of a U.S. real property interest are taxed in the same manner as income effectively connected with the conduct of a U.S. trade or business. This means that gains from dispositions of…
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IRS Form 3520 in a Nutshell

IRS Form 3520 in a Nutshell

Tax Law
By Anthony Diosdi This article is designed to provide the reader with an understanding of the Internal Revenue Service (“IRS”) Form 3520. U.S. persons who receive distributions, directly or indirectly, from a foreign trust are required to report a number of matters relevant to the trust on Form 3520, including the name of the trust and the aggregate distributions received during the taxable year. For this purpose, a distribution from a foreign trust includes any gratuitous transfer of money or property from a foreign trust, whether or not the trust is deemed to be owned by another person (such as a foreign grantor). A reportable distribution from a foreign trust includes the receipt of trust corpus and the receipt of a gift or bequest even though such amounts may not…
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A Closer Look at Gain Recognition Agreements in the Context of Cross-Border Transfers and Reorganizations

A Closer Look at Gain Recognition Agreements in the Context of Cross-Border Transfers and Reorganizations

Tax Law
By Anthony Diosdi Internal Revenue Code Section 367(a) provides a general rule of taxability with respect to outbound transfers of property in exchange for other property in transactions described in Section 332, 351, 354, 356 or 361 by stating that a foreign corporation will not be considered a corporation that could qualify for nonrecognition of gain under one of the enumerated Code sections. Section 367 requires U.S. persons transferring appreciated property to a foreign corporation to recognize a gain on the transfer. This result is achieved by denying the foreign corporation corporate status, in which case the general rules for taxable exchanges apply. The types of corporate transactions that typically fall within the scope of Section 367(a) include: 1) Incorporations- A U.S. person’s contribution of property to a foreign corporation…
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Reporting Cross-Border Transfers and Reorganizations on IRS Form 926

Reporting Cross-Border Transfers and Reorganizations on IRS Form 926

Tax Law
By Anthony Diosdi If a U.S. corporation is liquidated and its assets are distributed to foreign shareholders, U.S. tax will be imposed on the gain realized by the distributing corporation except to the extent that a tax-free-exchange provision provides otherwise. Likewise, if the stock or assets of a corporation are acquired by a foreign corporation in exchange for stock of the foreign corporation, or if, conversely, a foreign corporation is acquired for stock of a U.S. corporation, gain realized by U.S. shareholders and the U.S. corporation will also be subject to tax, except to the extent that the gain is sheltered by a tax-free-exchange provision. Even an acquisition of one foreign corporation by another foreign corporation involving U.S. shareholders who exchange their stock in the acquired corporation for stock in…
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An In Depth Look at the IRS Form 8865 and the Foreign Partnership Reporting Provisions of the Internal Revenue Code

An In Depth Look at the IRS Form 8865 and the Foreign Partnership Reporting Provisions of the Internal Revenue Code

Tax Law
By Anthony Diosdi This article discusses most of the Form 8865 questions and schedules. This article is designed to supplement the instructions promulgated by the Internal Revenue Service (“IRS”) for Form 8865. Foreign partnerships controlled by U.S. persons have informational reporting requirements that are similar to the information reporting rules that have been applied to controlled foreign corporations or CFCs. Under Internal Revenue Code Section 6038(a), a U.S. partner that controls a foreign partnership must annually file a Form 8865 with the IRS. A U.S. partner is considered to be in control of a foreign partnership if the U.S. partner holds, directly or indirectly, a greater than 50 percent interest in the capital, profits, or, to the extent provided in the regulations, deductions or losses of the partnership. See IRC…
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An In Depth Look at the IRS Form 8858 Used With Respect to Foreign Disregarded Entities and Foreign Branches

An In Depth Look at the IRS Form 8858 Used With Respect to Foreign Disregarded Entities and Foreign Branches

Tax Law
By Anthony Diosdi This article discusses most of the Form 8858 questions and schedules. This article is designed to supplement the instructions promulgated by the Internal Revenue Service (“IRS”) for Form 8858. Form 8858 is used by certain U.S. persons that operate a foreign branch or own a foreign disregarded entity directly, indirectly, or constructively. A foreign disregarded entity is an entity that is not created or organized in the United States and that is disregarded as an entity separate from its owner for U.S. income tax purposes. A foreign branch is defined as a “qualified business unit” or “QBU.” Section 989(a) of the Internal Revenue Code defines a QBU as “any separate and clearly identified unit of a trade or business of a taxpayer which maintains separate books and…
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