US inbound: IRS proposes new guidance for cloud transactions

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US inbound: IRS proposes new guidance for cloud transactions

Sponsored by

fenwick.jpg
ib-us-inbound.jpg

The Internal Revenue Service (IRS) has proposed new guidance regarding cloud transactions.

The Internal Revenue Service (IRS) has proposed new guidance regarding cloud transactions. This provides rules for classifying a cloud transaction as either a provision of service or a lease of property. In general, a cloud transaction involves access to property or use of property, instead of the sale, exchange, or licence of property, and therefore typically would be classified as either a lease of property or a provision of services. Under the proposed regulations most cloud transactions will be classified as the provision of services.

The proposed regulations define a cloud transaction as a transaction through which a person obtains non-de minimis on-demand network access to computer hardware, digital content, or other similar resources. This definition does not cover the mere download or other electronic transfer of digital content for storage and use on a person's computer hardware or other electronic device.

The proposed regulations provide a non-exhaustive list of factors for determining whether a cloud transaction is classified as the provision of services or a lease of property, including statutory factors described in section 7701(e)(1) and several factors applied by courts that the treasury and the IRS have determined are relevant. These factors include:

  • Whether the provider has the right to determine the specific property used in the cloud transaction and replace such property with comparable property;

  • Whether the property is a component of an integrated operation in which the provider has other responsibilities, including ensuring the property is maintained and updated; and

  • Whether the provider's fee is primarily based on a measure of work performed or the level of the customer's use rather than the mere passage of time.

Proposed regulations were also issued under Treas. Reg. 1.861-18 involving computer program transactions. The preamble states that a cloud computing transaction typically does not involve any transfer of a computer program classified as a transfer of a copyright or copyrighted article or any provision of development services or know-how relating to computer programs or programming. Although some cloud computing transactions may provide similar functionality with respect to computer programs, Treas. Reg. 1.861-18 does not address the provision of online access to use the computer program. Accordingly, Treas. Reg. 1.861-18 would not apply to classify such a transaction. The preamble states that other transactions exist that are not solely related to computing but still involve on-demand network access to technological resources (that is, cloud transactions). Examples include streaming music and videos, transactions involving mobile device applications, and access to data through remotely hosted software.

Fenwick & West

E: jpfuller@fenwick.com and dforst@fenwick.com

W: www.fenwick.com

more across site & shared bottom lb ros

More from across our site

For many taxpayers, the prospect of long-term certainty that a bilateral APA offers can override concerns about time, cost and confidentiality
Levine, who served under the Joe Biden administration, led the US’s negotiations on the OECD’s two-pillar solution
The deal to acquire ITR's parent company is expected to complete by the end of May 2025
JBS, the biggest meat company in the world, allegedly used Luxembourgian ‘mailbox companies’ to avoid taxes between 2019 and 2022
Despite the conviction of Jessa Dabalos, the Tax Practitioners’ Board’s investigative work continues with five outstanding PwC scandal probes
Heads of tax need to push their teams forward as strategic business advisers to add value across their organisations, says Sandy Markwick
Scott Bessent reportedly felt undermined by Musk naming Gary Shapley as acting IRS commissioner; in other news, Baker Tilly will combine with a top 15 US firm
The promise of nine years’ tax certainty and a ‘rational and pragmatic’ government process makes APAs a no-brainer, Indian tax advisers tell ITR
Despite garnering significant revenues from multinationals, Italy’s digital services tax presents pressing double taxation issues, say Stefano Simontacchi and Francesco Saverio Scandone of BonelliErede
ITR’s research shows that in-house tax counsel in Asia also feel underserved by their advisers’ international networks
Gift this article