Credit for Foreign Gross-Basis Withholding Tax

On September 23, 2010, the Internal Revenue Service (“IRS”) supplemented its prior exception from the application of IRC 901(l)(1) regarding transactions involving back-to-back licensing arrangements and retail distribution arrangements of certain intellectual property (such as copyrighted articles) entered into in the ordinary course of business. Notice 2010-65. Section 901(l)(1) generally disallows a credit for foreign gross-basis withholding tax on any item of income (other than dividends) or gain if 1) the recipient has not held the property for more than 15 days (within a 31-day testing period) exclusive of periods during which the recipient is protected from risk of loss (Section 901(l)(1)(A)) or 2) the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property. Section 901(l)(1)(B). This provision and its application was originally addressed on November 30, 2005, when the IRS stated that payments in certain back-to-back computer program licensing arrangements qualified as an exception to the application of Section 901(l)(1)(B). Notice 2005-90. Taxpayers can rely on this notice and its guidance for amounts that are paid or accrued after September 23, 2010. Regulations will be issued by the IRS and the Treasury Department incorporating this guidance. For more information please visit: http://www.irs.gov/irb/2010-41_IRB/ar09.html. –Elaina L. Blanks