Weighing the risk: US tax reforms driving MNEs to reassess IP models

The US tax environment continues to favour profit concentration in the US, when backed by economic and operational substance, particularly where income is linked to US-based intellectual property (IP), R&D, manufacturing, or other high-value functions. The Tax Cuts and Jobs Act of 2017 (TCJA) created the modern framework: a 21% corporate tax rate, a Section 250 deduction for certain foreign-derived income, a controlled foreign corporation (CFC) inclusion regime for global intangible low-taxed income (GILTI), and the base erosion and anti-abuse tax (BEAT) as a backstop against excessive deductible outbound related-party payments.

The 2025 tax legislation commonly referred to as the One Big Beautiful Bill Act (OBBBA) preserved that broad direction of the TCJA but made important technical changes for tax years beginning after December 31 2025. Foreign-derived intangible income is reframed as foreign-derived deduction eligible income (FDDEI), and GILTI as net CFC tested income (NCTI). Both changes remove the former deemed tangible asset return element and update the percentage deduction provided for FDDEI and NCTI under Section 250.

For US corporations, the FDDEI deduction is 33.34%, producing an approximate 14% US federal corporate effective tax rate on qualifying foreign-derived income before other limitations. For CFCs, the Section 250 deduction for NCTI is 40%, generally producing an approximate 12.6% rate before foreign tax credits, with the deemed-paid credit percentage increased to 90%. Multinational enterprise (MNE) groups should therefore model US-located and CFC-tested-income outcomes rather than assume one is always preferable.

The benefit is not automatic. FDDEI depends on satisfying detailed foreign-use, related-party, and intermediary rules; merely routing income through a US licensor or principal is not enough. BEAT remains a constraint for MNE groups relying on deductible outbound payments from the US to non-US affiliates, including interest, royalties, certain service payments, depreciable property acquisitions, and reinsurance premiums, with OBBBA stabilising the post-2025 BEAT rate at 10.5%.

OBBBA also strengthens the domestic case for US activity by restoring full expensing for domestic R&D through Section 174A, retaining 15-year amortisation for foreign R&D, restoring permanent 100% bonus depreciation for qualifying property, and introducing a new 100% depreciation regime for certain qualified production property. These rules increase the after-tax attractiveness of US-based development, production, and other value-creating activity.

Taken together, the current US rules can make US ownership or exploitation of IP attractive where it is aligned with the economic and operational substance in the US. MNE groups considering IP migration, outbound licensing, cost sharing, management fees, or principal structures should test the US tax result against FDDEI, NCTI, BEAT, foreign tax credit, and transfer pricing rules, and distinguish the tax cost of any one-off transfer from the recurring income profile.

MNE groups are reassessing IP ownership, outbound licensing, service arrangements, cost sharing, and principal models. The objective is not simply to access favourable US tax rules but to ensure that legal form, transfer pricing, operational substance, decision-making authority, control over risk, and contemporaneous evidence fully align with where value is actually created. In practice, that means testing whether the US entity has people, governance, funding, and risk-control capability in alignment with the profit allocation, and whether rest of world (RoW) entities continue to perform activities for which they should receive compensation.

One recurring theme is migration or re-migration of non-US intangible ownership to US corporations. The policy logic is straightforward: if a US corporation can earn qualifying foreign-derived income and align legal ownership with US-based development and control functions, the US platform may be more attractive than the alternative of holding IP outside the US.

That analysis must distinguish the tax cost of migrating IP from the future recurring income benefit. It should address exit taxation, valuation, withholding tax, indirect tax, US transfer pricing, and hard-to-value intangible (HTVI) risk, and, for RoW transferor jurisdictions, whether the transaction also constitutes a compensable business restructuring or transfer of profit potential. US rules on intangibles were broadened after TCJA, including the statutory expansion of intangible property and the ability of the Internal Revenue Service (IRS) to use aggregate or realistic-alternatives valuation approaches.

Business licence fees typically involve a US entity licensing IP, technology, brand rights, software, data, know-how, or other commercial intangibles to non-US group companies in return for royalties or licence fees. Businesses are reviewing these arrangements to test whether the relevant rights are clearly identified, whether the licence fee reflects the value actually made available to the RoW business, whether the royalty base and rate remain appropriate, and whether the resulting income can qualify for FDDEI treatment.

This review is particularly important as group value chains evolve in light of digitalisation, data-driven business models, platform technology, and supply chain transformation, which can change where value is created and how intangibles are developed, maintained, protected, and exploited. Outbound licensing arrangements, particularly US-licensor/European-licensee models, therefore require careful income-stream analysis rather than assumptions at entity level.

Where future income streams are materially uncertain, MNE groups should also consider whether unrelated parties would have agreed on contingent pricing, milestone payments, earn-out features, or revenue- or profit-linked licence terms. This is particularly relevant in jurisdictions that have adopted HTVI-inspired statutory price-adjustment rules.

That analysis should distinguish royalties for use of IP outside the US, embedded IP returns in sales or services, related-party licensing, and onward use or resale by intermediaries, and should be reconciled with transfer pricing documentation, legal agreements, invoicing, and the actual use of the licensed rights in the relevant markets.

MNE groups are also reassessing management and service fee arrangements where legacy charges may now generate BEAT exposure or where the US entity’s role has expanded such that it now implicates BEAT. The services cost method exception may remove the cost component of qualifying low-margin or cost-only services from BEAT, but it does not necessarily protect any mark-up or payments that fail the relevant requirements.

The US BEAT analysis should be performed alongside analyses of local-country deductibility, withholding tax, benefit-test, stewardship/shareholder-cost, and domestic anti-avoidance.

Modified cost sharing or co-development arrangements may also be revisited where the US participant is projected to bear a larger share of development activity, funding, or risk. Changes to such arrangements can create platform contribution, buy-in, buy-out, or compensable transfer issues and should be tested against realistic alternatives, control over risk, financial capacity, contractual allocation, and actual conduct.

Finally, some MNE groups are simplifying non-US operating models by converting full-fledged distributors into limited-risk distributors or commissionaire-type entities. Such conversions can support a US principal model only where the conduct of the parties changes in practice. These conversions can also raise non-US issues such as business restructuring compensation, exit charges, transfer of profit potential, permanent establishment risk, VAT and customs consequences, customer-contract changes, and whether the local entity has genuinely ceased to control or bear relevant risks.

Where changes are considered to be appropriate, implementation evidence is critical: revised contracts, governance materials, board minutes, risk-control evidence, personnel records, systems changes, pricing calculations, and post-implementation monitoring should show that the new model operates as described in the intercompany agreements and in the transfer pricing documentation.

Tax authorities outside the US are considering these changes. Focusing on the responses in Europe, it is clear that European tax authorities are responding with increasing confidence, supported by greater access to country-by-country reporting, local and master files, mandatory disclosure data, and exchange of information. That evidence allows authorities to compare historical characterisations of local entities with post-restructuring positions and test whether changes are supported by operational substance, not just revised contracts.

The starting point is accurate delineation of the actual transaction. Where a US entity licenses IP to a European subsidiary, tax authorities will scrutinise:

• Whether the intangible exists as a separable, protectable asset;

• What rights are transferred;

• Whether legal ownership aligns with development, enhancement, maintenance, protection, and exploitation (DEMPE) contributions;

• Whether the royalty base and rate are appropriate;

• Whether the charge duplicates services; and

• Whether the local entity receives identifiable value.

They may also examine whether the local entity contributes to local market intangibles, customer relationships, regulatory approvals, or implementation know-how that is not fully reflected in the charge.

Benchmarking is often difficult because the IP is high value, unique, or bundled with higher-value services. Businesses may therefore deploy a layered and corroborative approach: a comparable uncontrolled price analysis where reliable licences exist, supported by a transactional net margin method, profit split, or franchise-style analysis as corroboration.

However, the OECD framework remains focused on the most appropriate method; secondary methods should support, not contradict, the primary analysis. Presenting layered and corroborating analysis adds complexity to the analysis, particularly because each layer must be separately tested for comparability and consistency. However, it can be compelling where the analysis is thoroughly researched, supported by evidence, and clearly linked to the accurately delineated transaction.

Authorities also focus on what has changed. If a European subsidiary historically operated profitably without paying a royalty, or if a US principal earns lower margins than supposedly routine European entities, authorities may question whether the allocation of residual profit, cost, or risk matches the model applied by the business. Prior transfer pricing documentation and board-level evidence regarding modifications can be powerful evidence for or against the business.

A linked area is whether the arrangement constitutes a business restructuring and whether compensation should be paid by the US entity to the European subsidiary for rights, assets, profit potential, or contractual arrangements that are transferred, terminated, substantially renegotiated, or extinguished.

Under the framework in Chapter IX of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, the key question is whether something of value has moved, or whether independent parties would have compensated the change. Authorities will consider prior functions, risks, customer relationships, local intangibles, contractual rights, and the options realistically available to both parties.

European courts and tribunals have been receptive to tax authority arguments where the authority can point to the group’s own contemporaneous evidence describing a ‘transfer’ of assets, rights, profit potential, or decision-making capability. That makes internal papers, board materials, implementation plans, and historical transfer pricing documentation especially important evidence. In Germany for example, this analysis may be framed through the transfer-of-function rules, which seek to identify and value the profit potential transferred abroad, including goodwill, using a formulaic approach.

The options-realistically-available analysis is often the hardest point to support in practice. It is not enough to assert that the European subsidiary had no better alternative, or that the restructuring was mandated by a change in group strategy. The business should explain and prepare contemporaneous evidence of what realistic commercial alternatives existed for both parties, why those alternatives were accepted or rejected, and why the implemented terms were ones to which independent parties would have agreed. Retrospective explanations are much less persuasive once any tax audit has begun.

Valuation is usually the most contested part of an IP migration or restructuring. Authorities are likely to test the valuation assumptions and methodology against contemporaneous evidence, including the commercial rationale, forecasts of revenues and profits, business plans, and other information available at the transaction date. Where HTVI principles are engaged, authorities may also use post-transaction performance to challenge whether the taxpayer’s ex ante valuation properly reflected the risks and opportunities known, or reasonably foreseeable, at the time.

In some jurisdictions, the tax authorities’ starting point will be that independent parties would have agreed to an appropriate adjustment mechanism where actual profit developments materially diverge from the assumptions underlying the original pricing. Intra-group agreements also matter: termination rights, exclusivity, renewal provisions, territorial scope, ownership of improvements, and ongoing local contributions can materially affect value. The valuation analysis should therefore explain not only the numerical model but also the commercial rationale behind the valuation and the evidence available as of the date of the transaction.

So-called die on the vine approaches, under which the European entity receives a declining return over the useful life of an asset or group of assets, are not universally accepted by European tax authorities and may be subject to challenge if the local entity continues to perform valuable functions, maintain customer relationships, bear risks, or contribute to market intangibles. Local advice and contemporaneous evidence of the commercial rationale for the arrangement will be important.

MNE groups should also consider wider tax implications before proceeding. Withholding tax may apply to royalties and licence fees paid to a US parent and may not be fully relieved by a double tax treaty. Treaty access can also depend on beneficial ownership, substance, anti-treaty-shopping provisions, limitation on benefits clauses, principal purpose tests, and domestic anti-abuse rules.

Pillar two impacts should be carefully modelled before implementation. The interaction between FDDEI, NCTI, foreign tax credits, withholding taxes, local taxes, qualified domestic minimum top-up taxes, income inclusion rules, and undertaxed profits rules is complex and may produce outcomes that differ from headline US effective tax rates. This is particularly important where a restructuring changes the jurisdictions in which activities take place.

Domestic anti-avoidance rules may also limit deductions for payments to lower-tax recipients independently of the arm’s-length principle. DAC6 and domestic transparency regimes should be considered at the outset for restructurings involving royalties, IP transfers, entity conversions, material reductions in local profit, or cross-border transfers of functions, assets, or risks. Any disclosure should be aligned with the transfer pricing position, valuation assumptions, and implementation evidence, because mandatory disclosure data may later shape the audit starting point.

Advance pricing agreements (APAs) should be considered early. One-off IP transfers and valuations can present practical challenges for APAs because they are often highly fact-specific and valuation-driven, although the IRS and various European competent authorities have successfully concluded bilateral APAs providing certainty for IP transfers, business restructurings, and related valuation aspects. Recurring royalty, service, distribution, cost sharing, or principal arrangements are typically good candidates for seeking bilateral or multilateral certainty. In relation to business licence fee arrangements, it should be noted that some competent authorities will not include withholding tax aspects within the APA.

Mutual agreement procedures may be essential where audits create double taxation, but access depends on treaty coverage, the type of double taxation, competent authority positions, and whether arbitration is available.

The current US tax environment continues to make US-centred structures attractive where they are supported by US economic and operational substance and robust transfer pricing. However, European controversy risk is significant. Authorities are likely to test accurate delineation, compensable transfers, arm’s-length pricing, valuation, and implementation evidence.

MNE groups should therefore approach these restructurings as integrated tax, transfer pricing, valuation, legal, and potential controversy projects, supported by contemporaneous evidence, local-country analysis, and clear modelling of the US, European, withholding tax, pillar two, and dispute-resolution consequences. The MNE groups in the best position to sustain these models will be those that can show a coherent commercial rationale, robust and consistent documentation, and a clear link between where value is created and where profit is reported.

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