Treasury and the IRS, recently released final regulations for the Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI) (the Section 250 deduction) as enacted by the 2017 tax reform legislation. 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.