Tax Planning for Inbound Licenses of Intellectual Property in a Post 2017 Tax Cuts and Jobs Act World
By Anthony Diosdi The U.S. is the world’s largest recipient of foreign direct investment. Much of this investment is in the form of foreign owned intellectual property. Creators of foreign owned intellectual property typically will transfer some or all of their intellectual property rights through an inbound U.S. licensing agreement. Under U.S. domestic laws, a foreign person generally is subject to 30 percent U.S. federal tax on the gross amount of U.S. source income received from a licensing agreement. This is because all persons (“withholding agents”) making U.S.-sourced fixed, determinable, annual, or periodical or (“FDAP”) payments to foreign persons generally must report FDAP payments, such as royalties. Withholding agents are permitted to withhold at a lower rate if the beneficial owner of the intellectual property certifies their eligibility for the…