Baker McKenzie's North America Tax Practice Group has prepared a Client Alert on the final regulations regarding foreign-derived intangible income (FDII) deductions under section 250 of the Code.
The final regulations provide helpful and taxpayer-favorable guidance on relaxed documentation rules for establishing that the “foreign use” and foreign person requirements (for sales) and non-U.S. location requirement (for services) are satisfied. Previously, the proposed section 250 regulations imposed rigorous documentation rules that would have required taxpayers to adopt new and burdensome commercial arrangements with third parties to establish that a recipient is a foreign person, that property is for a foreign use, or that a recipient of a general service is located outside the United States. The final regulations relax all of these requirements, provide new rules for sales of property with “digital content,” create new rules for “electronically supplied” and “advertising” services, and provide helpful changes to the rules for foreign military sales and international transportation property. The final regulations also provide helpful guidance to taxpayers by harmonizing the definition of “foreign branch” income for FDII and foreign tax purposes and allowing corporate partners to take into account a partnership’s items of DEI and FDDEI.