US inbound: IRS proposes new guidance for cloud transactions

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2026

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

Shiny new offices like Ryan’s in London Bridge aren’t just a cost – they signal that a firm is willing to align with its clients’ interests
Darren Graves will succeed Richard Houston, who is set to lead Deloitte EMEA; in other news, Morgan Lewis hired a three-partner tax team in New York
India also signed its first-ever bilateral APAs with France, Ireland, Indonesia and Sweden last year, the CBDT revealed
Chile’s revamped GAAR marks a shift toward structural scrutiny, pushing MNEs to strengthen tax governance, economic substance and compliance strategies
New reforms represent the most seismic shift in Canadian TP legislation since its enactment and a clear inflection point for MNEs, ITR has heard
Spain did not transpose EU VAT rules for SMEs or works of art; in other news, an increased VAT threshold came into force in South Africa
While the IBS incorporates taxable events previously covered by state and municipal taxes, its governance and operational logic represent a significant departure from the legacy model
The new office on the fourth floor of 4 More London will span 14,230 square feet, with the potential to expand to the first and second floors
MNEs now face a shift from modelling to execution as the side‑by‑side deal forces tax teams to upgrade systems, harmonise data, and prevent costly pillar two mismatches
As recent surveys suggest a disconnect between AI adoption and employee engagement, the big four risk digging themselves into a strategic hole
Gift this article