United States: US Taxation Of IP After Tax Reform


U.S. taxation of intellectual property has become astoundingly more complex after the Tax Cuts and Jobs Act. The new rules are so complex that the IRS and Treasury are still figuring out the details of how they operate. Some important clarifying guidance has been issued recently, but more guidance and regulations are needed. The IRS has until June 2019 — 18 months after the act went into effect in December 22, 2017 — to issue regulations for them to be retroactive. This is a tight deadline considering the voluminous guidance that is needed.

A number of the new rules under the act specifically target the taxation of IP. Significant changes related to IP taxation include a new tax on certain global income earned by foreign subsidiaries and a new tax incentive for certain foreign-derived income earned by U.S. corporations. The law also reduced the corporate tax rate to 21 percent, compared with the previous top corporate tax rate of 35 percent. This generally makes the United States a more competitive location in which to operate and own IP than in the past.

The U.S. has historically had a worldwide system of taxation, where income earned by a U.S. taxpayer is subject to U.S. tax regardless of whether it is earned inside or outside the U.S. Most countries do not tax worldwide income, but rather have a territorial system that only taxes residents on the income earned in the country.

Although it was originally suggested that the act would move the U.S. to a territorial system to be in line with international taxation norms, and to make the country a more attractive place for multinational businesses to operate, the reality is that the U.S. still taxes worldwide income, unlike all other major countries.

Some of the Important Changes in Taxation of IP

Foreign-Derived Intangible Income Tax Incentive

The act created a new tax rule intended to encourage companies to have "foreign derived intangible income" earned in the U.S. Under the new rules, the tax rate on FDII, which is income arising from U.S. taxpayers selling or licensing property, including IP, or providing services to foreigners, can be reduced from the standard corporate tax rate of 21 percent to a favorable corporate tax rate of 13.125 percent. Specifically, FDII is defined as certain income derived in connection with (1) property that is sold, leased, licensed or otherwise exchanged or disposed by the U.S. taxpayer to a non-U.S. person for a foreign use, or (2) services provided by the U.S. taxpayer to a person located outside the United States.

If a U.S. corporation sells or licenses goods (including IP) to a foreign related party, the income should generally qualify as FDII if the property is ultimately sold to an unrelated foreign person, used to make property sold to an unrelated foreign person or used in providing services to an unrelated foreign person outside of the U.S. However, if, for example, a U.S. corporation sells IP to an unrelated party for further development within the U.S., the IP is not treated as sold for a foreign use even if the IP subsequently has a foreign use.

Even though FDII is labeled as a "foreign derived intangible income" tax provision, the new category of income is actually much broader. FDII generally applies to income from exports of goods and services, not just income from IP. FDII is not like a patent box tax incentive, which typically requires IP ownership and development in the country to qualify for the reduced tax rate.

New Global Intangible Low-Tax Income Tax

The act also added a unique U.S. tax on worldwide income of foreign subsidiaries called "global intangible low-taxed income." GILTI results in the immediate U.S. taxation of certain foreign income earned through controlled foreign corporations — known as CFCs, which are entities that are more than 50 percent owned by 10 percent U.S. shareholders. The GILTI rule is also broadly drafted and is not limited to intangibles, despite what the name "global intangible low-taxed income" indicates. The GILTI tax is a significant revenue raiser that helped pay for other tax changes in the act, including the decrease in the corporate tax rate.

The purpose of GILTI is to subject U.S. shareholders of CFCs to a minimum U.S. tax if the CFC's foreign income is taxed at a rate below 13.125 percent. GILTI generally results in a 10.5 percent minimum U.S. tax, in addition to any foreign taxes paid, on all foreign income after giving effect to a routine return on tangible property. Under the GILTI tax rules, the U.S. continues to use a worldwide system of taxation.

The new GILTI tax also reduces the benefit of using IP holding company CFCs to defer U.S. tax on global income. As a result, GILTI has the biggest impact on industries with low tangible property ownership when compared to revenues, such as the technology sector and the pharmaceutical industry, where companies rely heavily on IP in manufacturing and selling their products or delivering their services.

Taxation of Moving IP Offshore

The act also made certain changes that make it more costly to transfer IP outside the United States. Previously, certain otherwise tax-free transfers of patents, know-how, copyrights, trademarks, franchises, licenses and other similar IP created a taxable deemed royalty in the U.S., resulting in a tax cost in the U.S. to transferring IP offshore. The act added goodwill, going concern value and workforce in place to the list of IP that is subject to the deemed royalty, creating an additional tax cost to moving IP offshore.

This change, coupled with the provisions discussed above, serve as a disincentive to transferring U.S.-owned IP abroad.

Should IP be Brought Back to the US?

Even with the act's changes to international tax rules, multinational corporations generally do not benefit from bringing any offshore IP back to the U.S. The U.S. tax rate on income from IP owned abroad under GILTI is approximately 10.5 percent, while IP owned in the U.S. is taxed at a higher 13.125 percent tax rate under FDII.

In addition, FDII is unlikely to be a provision that a company can rely on in its long-term planning. A shift in political leadership in the U.S. could easily result in a higher FDII rate. In order to balance the budget to get the act passed, Congress has already opted to increase the FDII rate in 2026 to 16.4 percent. It is also uncertain how long the FDII incentive will remain. FDII might be deemed an impermissible export subsidy by the World Trade Organization, and the U.S. could decide to remove the FDII benefit at any time. It generally would be inadvisable to restructure your IP ownership or operations based on an expected FDII benefit.

Furthermore, the act of bringing IP back into the U.S. through a related party sale would likely trigger additional foreign income that could be subject to GILTI taxation. For example, sale of IP that has dramatically increased in value by a holding company in a low-tax jurisdiction could result in additional income that is GILTI. Foreign taxes could also apply to this IP transfer, which could significantly add to the cost of onshoring the IP. Additionally, as discussed above, once the IP is in the U.S. it could be very costly to offshore it in the future.


The act has drastically changed the landscape of U.S. IP taxation. Although streamlining of taxation and simplicity of the U.S. tax code were promoted as the reasons the act was necessary, in reality the law increased the complexity of the U.S. tax rules significantly. As a result, any past IP tax planning should be carefully re-evaluated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
25 Sep 2018, Conference, California, United States

We're excited to introduce Women's IP Strategy, a 2-day conference that tackles both the IP, legal as well as broader career development obstacles, risks and rewards for women lawyers working in male-dominant industries.

2 Oct 2018, Webinar, California, United States

This CLE webinar will offer suggestions to litigators to help them comply with the new GDPR during e-discovery.

10 Oct 2018, Webinar, California, United States

For the past years, 3D printing has significantly revolutionized the business industry as it provides innovations and improvement to pre-existing processes.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions