Practical considerations from the final Section 250 regulations

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July 2020

Overview

Treasury and the IRS, on July 9, released 295 pages of final regulations (the Final Regulations) addressing the Deduction for Foreign-Derived Intangible Income and Global Intangible Low-Taxed Income (the Section 250 deduction) as enacted by the 2017 tax reform legislation (the Act). The Section 250 deduction generally provides taxpayers a deduction with respect to deemed intangible income earned from servicing foreign markets directly from the United States or through controlled foreign corporations (CFCs).

The Final Regulations deviate from the Proposed Regulations, issued in March 2019, in some notable respects. Significantly, the Final Regulations relax the documentation rules required for substantiating that certain transactions generate foreign-derived deduction eligible income (FDDEI). Additionally, the Final Regulations revise the FDDEI sales and services rules to address additional types of transactions (such as those involving digital content) and to provide more specific rules for sales of both general and intangible property. The Final Regulations also address certain issues related to the computation of FDII and the Section 250 deduction, including the taxable income limitation, certain expense allocation rules, and the definition of foreign branch income.

Also noteworthy is the delayed effective date for almost the entirety of the Final Regulations package, applying for tax years beginning on or after January 1, 2021. This allows taxpayers time to prepare before the rules take effect. Meanwhile, taxpayers may rely on the Final Regulations (or the Proposed Regulations) for tax years beginning before such date. 

We will discuss the Section 250 deduction guidance on a PwC Webcast scheduled for July 21 at 2:00 pm ET.

The Final Regulations provide a number of welcome changes. In addition to the delayed effective date, these include:

  • relaxations to substantiation requirements; 
  • flexibility on computation of taxable income limitation; 
  • conformity to the foreign tax credit definition for foreign branch basket income;
  • helpful clarification relating to whether certain (newly added) subcategories of sales of general and intangible property are sold for a foreign use; 
  • elimination of the requirement that certain general property not be subject to a domestic use for a three-year period following delivery; and 
  • potential expansion of FDII benefits to toll manufacturing and related-party sales to address involvement of U.S. parties. 

Taxpayers should review and assess the impact of the provisions in the Final Regulations.

Contact us

Doug McHoney

International Tax Services (ITS) Leader, PwC US

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