Date Extended for Applying Foreign Branch Transaction Rules


The IRS has announced a new one-year extension for applying the Code Sec. 987 final and related temporary regulations covering foreign branch transactions of U.S. corporations. The regulations will now apply to tax years beginning on or after the date that is three years after the first day of the first tax year following December 7, 2016. For a calendar year taxpayer, this means the date is extended from January 1, 2019, to January 1, 2020. Taxpayers may choose to apply the regulations to tax years beginning after December 7, 2016.

What Do the Regulations Cover?

A foreign branch of a U.S. corporation records its operations in its foreign currency. The income or loss is then translated into U.S. dollars for purposes of calculating U.S. tax. A foreign branch that takes these steps is referred to as a qualified business unit (QBU). A QBU must compute its taxable income or loss separately in its functional currency, and then translate the income or loss at the appropriate exchange rate.

Final and temporary regulations issued at the end of 2016 provided long awaited guidance on the Code Sec. 987 rules. The regulations were to be applied to tax years beginning on or after one year after the first day of the first tax year following December 7, 2016. For a calendar year taxpayer, this was January 1, 2018.

The applicability date of the regulations was extended by one year in Notice 2017-57, I.R.B. 2017-42, 324. As a result, the regulations applied to tax years beginning on or after twoyears after the first day of the first tax year following December 7, 2016. For a calendar year taxpayer, this was January 1, 2019. A taxpayer could apply the regulations to tax year beginning after December 7, 2016.

The final regulations cover:

  • the determination of taxable income of a Code Sec. 987 QBU, and
  • the timing, amount, character and source of Code Sec. 987 gain or loss.

Related temporary regulations address the recognition and deferral of foreign currency gain or loss in connection with QBU terminations, among other rules.

Why Were the Regulations Extended?

As a result of an Executive Order, a number of significant regulations that required additional review were identified, including the Code Sec. 987 regulations. Changes are being considered that would allow taxpayers to elect to apply alternative rules for transitioning to the final regulations, and for determining Code Sec. 987 gain or loss. It is possible that the extension is connected to the review of these regulations.