In The News

Difference Between Sales, Services Could Cause FDII Problems


12 Mar 2019
Reprinted with permission.

Morrison & Foerster partner Bernie J. Pistillo discussed how U.S. companies claiming a deduction on foreign-derived intangible income will need to untangle complex transactions to document sales and services under recent proposed regulations, which have a few ambiguities that could trip up unsuspecting businesses in the Law360 article entitled, “Difference Between Sales, Services Could Cause FDII Problems.”

Pistillo indicated that while companies have flexibility about whether they structure their transactions as a sale or a service, they also face uncertainty in the sense that the Internal Revenue Service might not agree with their characterizations. He said, “this can have dramatic consequences in the FDII world, since a sale — including a license — of property to a U.S. person cannot qualify as FDII, whereas services provided to any person located outside the U.S. can generate FDII.” He went on to say that intangible property licensed to foreigners will produce nonqualifying income to the extent that it’s used in the U.S., making qualification and disqualification a “one-way street.” He said, “where the facts demonstrate the need, taxpayers therefore may be incentivized to characterize a transaction as generating services income rather than sales income.”



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