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IRS and Treasury Extend Transition Period for Exception to Taxation of Foreign Royalties

S.J. Steinhardt
Published Date:
Apr 4, 2023

iStock-912219896 Mind Brain Gears Intellectual Property

The IRS and the Treasury Department are extending a transition period for an exception to the requirement for companies to pay taxes on royalties for intellectual property abroad, Accounting Today reported.

Notice 2023-31 announced that when proposed regulations under Section 903 of the Tax Code are finalized, the Treasury Department and the IRS intend to extend the transition period for the single-country exception's documentation requirement from May 17, 2023, to 180 days after the date final regulations adopting the single-country exception are filed with the Federal Register.

Section 901 of the Internal Revenue Code allows a credit for foreign income, war profits, and excess profits taxes. Section 903 provides that such taxes include a tax in lieu of a generally imposed foreign income, war profits, or excess profits tax.

"A foreign tax is a creditable net income tax only if the determination of the foreign tax base conforms in essential respects to the determination of taxable income under the code," the notice read. "To meet this test, a foreign tax must satisfy the net gain requirement, which comprises the realization requirement, the gross receipts requirement, the cost recovery requirement (formerly the net income requirement), and the attribution requirement."

The single-country exception provides relief from the source-based attribution requirement under Section 903 for foreign withholding taxes on royalties paid for the use of intellectual property within the withholding jurisdiction.

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