Tax Concerns On Outbound I.P. Transfers: Pitfalls & Planning

OVERVIEW

In a 21st century America where new ideas continually create new intangible property ("I.P."), U.S. corporations often desire to contribute their I.P. to a foreign affiliate who then develops and markets the I.P. and its progeny around the world. The desired tax goals are to have the I.P. transferred tax free and defer the U.S. taxation of the profits earned by the foreign affiliate until the profits are repatriated back to the U.S. as a dividend.

When the outbound transfer of I.P. would otherwise receive tax-free treatment under Code §351 (or another tax-free rule), Code §367(d) steps in to prevent tax deferral. Code §367(d) recharacterizes the I.P. transfer as a sale of the I.P. for a future stream of royalties, which are taxable to the U.S. corporate transferor as ordinary income.