The IRS recently announced through Notice 2023-31 that it will provide a longer transition period for the documentation requirement when the single-country exception to the source-based attribution requirement in the proposed foreign tax credit regulations is finalized. The amended transition period will provide that the required license agreement must be executed no later than 180 days after the date that the final regs adopting the single-country exception are filed with the Federal Register.
A Limited Exception
The IRS issued proposed regs in November 2022 that provided a limited exception to the source-based attribution requirements for withholding taxes on certain royalty payments. Under the proposed regs, the source-based attribution requirement is satisfied if, among other things, the income qualifies for the single-country exception. Generally, this exception applies if:
- The income subject to the foreign tax is characterized as royalty income under that country’s tax law, and
- The payment giving rise to such income is made under a single-country license.
The documentation requirement in the proposed regs provides that such a license agreement must be executed no later than the date on which the royalty is paid.
The proposed regs also provide a transition rule for the documentation requirement because the single-country exception would apply to periods that preceded the release of the proposed regs. This transition rule requires that the license agreement must be executed no later than May 17, 2023. Also, the agreement must state that any royalties paid on or before the execution of the agreement are considered paid under the agreement.
The Agency’s Rationale
According to the Notice, the IRS is providing a longer transition period to provide an “orderly implementation of the requirements of the single-country exception, including for relevant periods before” the single-country exception is finalized.
Taxpayers may rely on this guidance for foreign taxes paid in tax years beginning on or after December 28, 2021, and ending before the effective date of final regulations adopting the single-country exception, provided that the foreign tax is otherwise eligible for the single-country exception under the proposed regs.
The implementation of regs related to the foreign tax credit is expected to have a major impact on international taxation. If you believe they could affect your tax situation, consult the international tax team at Sol Schwartz & Associates for more information and assistance. Just leave your contact information below and we will get back to you promptly.