How Section 367(d) Taxes Outbound Intangible Transfers

Section 367(d) of the Internal Revenue Code is a rule that governs the transfer of intangible property by a U.S. person to a foreign corporation. Its primary function is to prevent the tax-free relocation of future profits generated from valuable intangibles developed in the U.S. to jurisdictions with lower tax rates.

Without this rule, a company could develop a profitable patent in the United States and then transfer it to a subsidiary in a low-tax country without immediate tax consequences, shifting subsequent income away from the U.S. tax base. The law counters this by recharacterizing what would otherwise be a tax-free transfer into a transaction that generates ongoing U.S. taxable income, ensuring the U.S. can tax the income from the asset.

Scope of Outbound Intangible Property Transfers

These rules apply to specific types of cross-border transactions that would otherwise qualify for non-recognition of gain or loss. These include transfers to a controlled corporation under Section 351, where a person transfers property to a corporation in exchange for stock and is in control of it immediately after. It also applies to certain transfers that are part of a corporate reorganization plan, governed by Section 361.

The parties involved in these transactions are clearly defined. The transferor must be a “U.S. person,” which includes U.S. citizens and residents, domestic corporations, and domestic estates or trusts. The recipient of the intangible property must be a “foreign corporation.”

The definition of “intangible property” is broad and encompasses a wide array of assets. It includes intellectual property, operational assets, and other items of value, such as:

• Patents, inventions, formulas, processes, designs, and patterns
• Copyrights for literary, musical, or artistic works, as well as trademarks, trade names, and brand names
• Franchises, licenses, and contracts that grant rights to use property or receive income
• Methods, programs, systems, and customer lists
• Goodwill, going concern value, and workforce in place
• Any other similar item whose value is not attributable to tangible property or individual services

The Commensurate with Income Standard

Instead of recognizing a single, upfront gain, the law treats the U.S. transferor as having sold the intangible property in exchange for a series of annual payments. These payments are deemed to be received over the useful life of the property. This structure creates an ongoing income stream for the U.S. transferor.

This treatment is governed by the “commensurate with income” (CWI) standard. The CWI standard dictates that the deemed annual payment is not a fixed amount determined at the time of the transfer. Instead, it must be adjusted each year to accurately reflect the income and profitability the intangible property generates for the foreign corporation. This dynamic adjustment is why the rule is sometimes referred to as a “super-royalty.”

Consider a U.S. parent company that develops a software patent and transfers it to its subsidiary in a low-tax jurisdiction. In the first year, the software has modest sales, so the deemed royalty payment is relatively small. However, if by the third year the software becomes a market leader and generates substantial revenue for the foreign subsidiary, the CWI standard requires the deemed payment back to the U.S. parent to increase significantly to match this success.

A consequence of this deemed income is its character and source. The payments are treated as ordinary income to the U.S. transferor, not as capital gain, and the income is sourced from the United States. This U.S. sourcing rule prevents the U.S. transferor from using foreign tax credits to offset the U.S. tax liability on this deemed income, which can lead to double taxation.

Treatment of Subsequent Dispositions

The tax implications do not end with the initial transfer and subsequent annual income inclusions. The rules also address what happens if the intangible property or the foreign corporation itself is later sold. These “subsequent disposition” rules are designed to prevent avoidance of the ongoing income stream established by the commensurate with income standard.

The first scenario occurs if the foreign transferee corporation disposes of the intangible property to an unrelated party. The original U.S. transferor is treated as having sold the intangible property at that moment and must recognize a lump-sum gain. This gain is calculated based on the fair market value of the intangible at the time of the subsequent disposition, not its value at the time of the original transfer.

The second scenario is triggered if the U.S. transferor disposes of the stock of the foreign transferee corporation to an unrelated party. This action is treated as an indirect disposition of the underlying intangible property. This event accelerates the tax liability, and the U.S. transferor must recognize gain based on the intangible’s fair market value at the time the stock is sold. These rules ensure that the full value of the intangible is taxed in the U.S. if the connection to the asset is severed.

Reporting Requirements and Available Elections

Information and Preparation

Reporting a transfer subject to these rules is a detailed process using Form 926, “Return by a U.S. Transferor of Property to a Foreign Corporation.” A U.S. person making a covered transfer must gather specific information for this form, including a detailed description of each intangible asset transferred. The filer must also provide the estimated fair market value of the property on the date of the transfer and information about the transferee foreign corporation. A specific section of Form 926 is dedicated to intangible property, requiring filers to list each intangible and provide details about its transfer.

Procedural Action

The completed Form 926 must be attached to the U.S. transferor’s federal income tax return for the tax year in which the transfer occurred. For example, if a corporation transfers a patent on June 1, 2025, the completed Form 926 must be filed with its 2025 corporate income tax return. Failure to file Form 926 can result in penalties, calculated as 10 percent of the fair market value of the transferred property, capped at $100,000 unless the failure is due to intentional disregard.

Available Elections

While the ongoing, deemed royalty treatment is the default rule, limited elections are available. Under narrow circumstances, a taxpayer may elect to treat the transfer as an immediate taxable sale for a lump-sum payment, requiring the full gain to be recognized in the year of the transfer. Additionally, for intangibles with a long or indefinite useful life, a taxpayer may elect to include the deemed payments over a 20-year period rather than the entire life of the asset. This election requires attaching a specific statement to the tax return for the year of the transfer.