On December 16, 2016, the IRS released the final regulations under Section 367 that address the tax consequences of outbound asset transfers. The impact of these regulations could change how businesses plan for foreign entity restructurings and check-the-box elections. The final regulations are effective for transfers occurring before September 14, 2015, and for transfers taking place on or after September 14, 2015, for which a check-the-box election is filed on or after September 14, 2015.
The final regulations impose the following:
- Goodwill and going concern value will be subject to the deemed sale rules.
- When the useful life of the transferred property is expected to exceed 20 years, the taxpayer may choose to limit income inclusions to a 20-year period if the income recognized during that period reasonably reflects what would be required over the useful life of the property.
- The scope of property eligible for the active trade or business exception has been limited to primarily tangible property.
These final regulations impact entity selection planning as well as planning for acquisitions and restructurings of foreign entities. Previously non-taxable restructuring of foreign entities and branches now bring with them a tax burden that should be considered, as demonstrated in the example below.
Temporary Regulations | Final Regulations | ||||
Asset Balance | US Tax Cost* | Balance | US Tax Cost* | ||
| Cash | 100,000 | 0 | Cash | 100,000 | 0 |
| Fixed Assets (NBV) | 250,000 | 0 | Fixed Assets (NBV) | 250,000 | 0 |
| Goodwill (zero basis) | 350,000 | 0 | Goodwill (zero basis) | 350,000 | 122,500 |
700,000 | 0 | 700,000 | 122,500 | ||
