On Nov. 22, 2022, Final 2021 Foreign Tax Credit (FTC) Regulations were issued addressing changes to the definition of creditable foreign taxes that resulted in the potential disallowance of these taxes as credits for U.S. taxpayers. This included withholding taxes related to royalties, especially when paid from a country where the withholding taxes were being assessed on the total amount of the royalties paid even if the intangibles were not used 100% within that country.

It was suggested that agreements concerning these royalties be modified by May 17, 2023, to include language in Prop. Reg. Sec. 1.903-1(c)(2)(iv)(B). Here are four steps you can take related to royalties. 

Notice 2023-31 was just released extending the date for these modified agreements to be executed until 180 days after the final regulations adopting the single-country exception are filed with the Federal Register.

Single-Country License

The proposed regulation states the following as what needs to be in the agreement for it to be the exception to the normal rule that the tax can only be assessed against royalties paid for the use of the intangible in the country assessing the tax:

(iv) Single-country license

(A) In general. Except as otherwise provided in this paragraph (c)(2)(iv), for purposes of paragraph (c)(2)(iii)(B) of this section, a payment is made pursuant to a single-country license if the terms of the license agreement pursuant to which the payment is made characterize the payment as a royalty and limit the territory of the license to the foreign country imposing the tested foreign tax.

(B) Separately stated portions. If a written agreement that is not described in paragraph (c)(2)(iv)(A) of this section separately states a portion (whether as a specified amount or as a formula) of the payment subject to the tested foreign tax and such portion is both characterized as a royalty under the terms of the agreement and is attributable to the part of the territory of the license that is solely within the foreign country imposing the tested foreign tax, then that portion of the payment is treated as made pursuant to a single-country license.

If you need assistance, our international tax advisors at Moore Doeren Mayhew can assist you in reviewing your present agreements as they relate to these FTC changes. Contact us today.