Bloomberg, IRS Foreign-Derived Income Guidance Rewards US-Based Intangibles:
Recent guidance released by the IRS on what kinds of foreign-earned income qualify for a highly lucrative tax deduction underscores Republicans’ goal of rewarding companies for keeping IP in the US, tax practitioners say.
The guidance is “very consistent with the policy we’ve seen in OBBBA as well as what was perhaps intended in the Tax Cuts and Jobs Act, which is rewarding and obtaining international intellectual property and other elements in the United States,” said Cory Perry, partner at Grant Thornton’s Washington National Tax Office, referring to the GOP’s 2025 and 2017 tax laws.
The IRS provided taxpayers with clarity in its Dec. 4 guidance on a measure included in the $3.4 trillion tax-and-spending law enacted in July meant to curb the use of a deduction for income from the sale of intangible property, known as the foreign-derived deduction-eligible income, or FDDEI, provision.
The agency names transactions that are considered effective sales or dispositions of intellectual property, and therefore don’t qualify for a tax break.
The Tax Cuts and Jobs Act, passed by Republicans in 2017, included the first iteration of FDDEI, the foreign-derived intangible income deduction under Section 250 of the tax code. Under FDII, companies that repatriated their IP received a deduction on income earned from those assets abroad.
The measure was meant to encourage companies to bring back their intangibles amid concerns that US companies were shifting profits made from lucrative IP to low-tax jurisdictions. But there was no distinct rule prohibiting companies from taking the deduction on income made from the sale of IP overseas.
Gary Scanlon, a principal at KPMG, said the Dec. 4 guidance was rather narrow and was expected, considering that Treasury telegraphed clarity on the issue earlier in the year. But he also echoed Perry, stating that the guidance make sense because Congress’s intent was to reward “the sale of the fruit of the tree. We don’t want to incentivize selling the tree itself.”
Closing the Loophole
The 2025 tax law renamed FDII to FDDEI and expanded the deduction by removing a threshold for income made from investments in tangible assets to qualify.
The law also added a measure under Section 250 that disqualified companies from taking a FDDEI deduction for the sale or other disposition of intangible property and the sale or disposition of property that “is subject to depreciation, amortization, or depletion.”
IRS’s Dec. 4 guidance provides companies clarity on what constitutes a “sale” of intangible property, which includes a “deemed sale,” or “deemed disposition” of IP. For example, if a domestic company sells an exclusive license to use IP in a foreign company for the duration of it’s copyright, it’s considered an effective sale of IP and isn’t eligible for the deduction under FDDEI.
The guidance “confirms that sale versus license is based on US tax principles,” Scanlon said. “You can’t just call something a license when it’s really a sale.”
Joshua Ruland, a principal at EY’s National Tax Department, said that in some cases, taxpayers were previously indifferent about the character of their IP transactions—whether to sell or license intangible property.
But following the changes made by both Congress and the IRS, they’re going to be more keyed in to the transactions because it will have an impact on whether they qualify for a tax deduction.
The guidance “highlights the character of the transactions,” said Ruland. “I think there will be a larger focus now on that fact, that characterization.”
Josh Odintz, a partner at Holland & Knight, similarly said the guidance is helpful for corporate taxpayers to make informed decisions about how they structure their licenses.
“This is clearly a line that I think it’s important to help draw, so that when taxpayers do decide to license software or a patent, etc., they understand there are limitations in order to qualify” for the deduction, he said.
