R&D-services income that two U.S. companies earn from their foreign parent qualifies as FDDEI in full under section 250(b)(4)(B)

Plain-English summary

This ruling is about the deduction for foreign-derived intangible income (FDII) under Section 250, which rewards U.S. corporations for income earned by serving foreign customers. To get the deduction, the income must be "foreign-derived deduction eligible income" (FDDEI), and for services that generally means the service benefits a recipient's operations outside the United States. Here, two U.S. research-and-development companies performed R&D services for their foreign parent company, which owns the resulting intangible property and uses it to manufacture products. A related U.S. distributor buys finished products from the foreign parent and sells them in the United States. The question was whether the R&D-services income was fully foreign-derived, or whether part of the benefit flowed to the U.S. distributor (which would make part of it domestic). Applying the transfer-pricing "benefit" principles of Treas. Reg. § 1.482-9, the IRS concluded the U.S. distributor is a limited-risk buyer that gets no direct benefit from the R&D (it owns no IP and bears no R&D risk), so the foreign parent is the sole business recipient. The IRS ruled the R&D-services income may be treated as gross FDDEI in full.

Ruling snapshot

• Question: Is the income the U.S. R&D companies earn from providing R&D services to their foreign parent FDDEI in full under IRC § 250(b)(4)(B)?
• Outcome: approved (ruled FDDEI in full)
• Key authorities: IRC § 250(b)(3), (4); Treas. Reg. §§ 1.250(b)-1, 1.250(b)-5; Treas. Reg. § 1.482-9

Full text (IRS public release)

 Internal Revenue Service                                  Department of the Treasury
                                                           Washington, DC 20224

 Number: 202502002                                         Third Party Communication: None
 Release Date: 1/10/2025                                   Date of Communication: Not Applicable
 Index Number: 9416.00-00, 9416.01-00,
               9416.02-00                                  Person To Contact:
                                                           ------------------, ID No. -----------------
 -----------------                                         Telephone Number:
 -----------------------------------------------           --------------------
 ----------------------------------                        Refer Reply To:
 --------------                                            CC:INTL:B06
                                                           PLR-107583-24
                                                           Date:
                                                           October 15, 2024




Legend

ForeignOpCo =-------------------------------------------
ForeignHoldCo =---------------------------------
USHoldCo =-----------------------------
USR&DCo1 = -------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
USR&DCo2 = -------------------------------------
USDistributor = -------------------------------------------------
Country A = --------

Dear --------------:

This responds to your authorized representative’s letter dated April 10, 2024,
supplemented with a letter dated July 25, 2024. You have requested a ruling on whether
certain income earned from providing research and development services (the “R&D
Services”) constitutes foreign-derived deduction eligible income (“FDDEI”) in full for
purposes of section 250(b)(4)(B) and the accompanying regulations. The material
submitted in that request and information provided in later correspondences is
summarized below.

The ruling contained in this letter is based on information and representations submitted
by the taxpayer and accompanied by a penalty of perjury statement executed by an
appropriate party. While this office has not verified any of the material submitted in
support of the request for a ruling, it is subject to verification on examination.

This office expresses no opinion as to the overall tax consequences of the R&D
Services described in this letter or as to any issue not specifically addressed by the
ruling below.
PLR-107583-24                                 2


                                  SUMMARY OF FACTS

ForeignOpCo is a corporation organized under the laws of Country A and has been in
existence for a substantial number of years. ForeignOpCo develops, manufactures, and
distributes pharmaceutical products, medical devices, and other biotechnology products
worldwide. ForeignHoldCo is a publicly traded corporation organized under the laws of
Country A that owns all the stock of ForeignOpCo and is the parent of the worldwide
group. ForeignOpCo owns certain intangible property that it uses to manufacture
finished products for distribution (the “Product IP”). ForeignOpCo maintains offices and
factories in Country A and does not have any significant operations outside of Country
A. Any group operations outside of Country A are conducted through local subsidiaries
or third parties.

USR&DCo1 and USR&DCo2 (or, collectively, the “USR&DCos”) are domestic
corporations that have been in existence for over a decade, and are wholly owned by
USHoldCo, a domestic corporation that is wholly owned by ForeignOpCo. ForeignOpCo
has entered into Master Services Agreements (“MSAs”) with the USR&DCos to provide
R&D Services for the development of the Product IP. In some cases, the USR&DCos
may subcontract certain of the R&D services to third party R&D service providers.

Under the MSAs, ForeignOpCo directs product development, which includes basic
research and clinical studies. All rights and title with respect to any IP that is developed,
including any trademarks, vest solely in ForeignOpCo. ForeignOpCo pays the
USR&DCos a service fee equal to their direct and indirect costs plus a fixed markup on
certain of those costs. None of ForeignOpCo’s other US or foreign affiliates are directly
involved in the supply chain relating to the Product IP or pay any of the costs of
developing the Product IP. Once the Product IP is developed, ForeignOpCo
manufactures the products using the Product IP, sometimes via third party contract
manufacturers. These products are then distributed through various channels.

ForeignOpCo has a distribution agreement with USDistributor, a domestic corporation
that was established several decades ago, and is also wholly owned by USHoldCo.
USDistributor purchases all products incorporating the Product IP from ForeignOpCo
and distributes them solely in the United States. ForeignOpCo grants USDistributor a
royalty-free license to use its trademark rights, which USDistributor exercises at its own
risk and expense, such as by bearing all costs of packaging the products sold in the
United States.

USDistributor does not obtain any ownership rights in the Product IP and does not bear
any risk of loss with respect to unsuccessful R&D Services that do not result in finished
products reaching the US market. ForeignOpCo and USDistributor apply the
comparable profits method (“CPM”) to determine an appropriate operating margin (i.e.,
operating profit divided by sales revenue) with respect to the distribution of the products.
USDistributor generally earns a cost-plus markup on the operating margin for each
PLR-107583-24                               3

product. ForeignOpCo and USDistributor may terminate the distribution agreement at
will.

                                 REPRESENTATIONS

    1. The Product IP constitutes intangible property under section 367(d)(4).

    2. ForeignOpCo solely possesses all rights and ownership with respect to the IP
      created or enhanced by the R&D Services.

    3. ForeignOpCo has operations only outside the United States and does not
      maintain an office or fixed place of business in the United States.

    4. ForeignOpCo does not provide services to business recipients or consumers
      located in the United States, as such terms are defined in Treas. Reg. § 1.250(b)-
      5(c)(3) and (4), respectively.

    5. The R&D Services provided by USR&DCo1 and USR&DCo2 are general
      services under Treas. Reg. § 1.250(b)-5(c)(6).

    6. The substantiation requirements contained in Treas. Reg. § 1.250(b)-5(e)(4) will
      be satisfied with respect to the R&D Services income earned by USR&DCo1 and
      USR&DCo2.

    7. ForeignOpCo pays an arm’s-length fee to USR&DCo1 and USR&DCo2 for the
      provision of the R&D Services, as determined under section 482 and the
      regulations thereunder.

    8. USDistributor pays an arm’s-length price for the products purchased from
      ForeignOpCo, as determined under section 482 and the regulations thereunder.

                                         LAW

Section 250 of the Code provides a deduction for foreign-derived intangible income
(“FDII“) of a domestic corporation and the global intangible low-taxed income (“GILTI“)
that is included in the gross income of such domestic corporation under section 951A.
For taxable years beginning after December 31, 2017, and before January 1, 2026,
section 250(a)(1) allows a deduction in an amount equal to the sum of (i) 37.5 percent
of the taxpayer’s FDII plus (ii) 50 percent of the sum of the taxpayer’s GILTI and the
associated section 78 gross-up. For taxable years beginning after December 31, 2025,
section 250 allows a deduction in an amount equal to the sum of (i) 21.875 percent of
the FDII plus (ii) 37.5 percent of the GILTI plus the associated section 78 gross-up.

Section 250(b)(1) and Treas. Reg. § 1.250(b)-1(b) define FDII as the product of the
domestic corporation’s deemed intangible income (“DII”) for the year multiplied by a
PLR-107583-24                                 4

fraction (the “foreign derived ratio”), the denominator of which is the corporation’s
deduction eligible income (“DEI”) and the numerator of which is its FDDEI (defined
below). Treas. Reg. § 1.250(b)-1(c)(13). Section 250(b)(2)(A) and Treas. Reg. §
1.250(b)-1(c)(3) provide that DII is equal to the corporation’s DEI less its deemed
tangible income return (section 250(b)(2)(B) and Treas. Reg. § 1.250(b)-1(c)(4)), which
is an amount equal to 10 percent of the corporation’s qualified business asset
investment.

Section 250(b)(3) and Treas. Reg. § 1.250(b)-1(c)(2) provide that DEI means, with
respect to any domestic corporation, the excess (if any) of the corporation’s gross
income, with certain adjustments, over the deductions properly allocable to such gross
income. For this purpose, Treas. Reg. § 1.250(b)-1(c)(15) provides that gross income is
determined without regard to the following items: (i) any amount included in the gross
income of such corporation under section 951(a)(1); (ii) the GILTI included in the gross
income of such corporation under Treas. Reg. § 1.951A-1(c); (iii) any financial services
income (as defined in section 904(d)(2)(D)) and Treas. Reg. § 1.904-4(e)(1)(ii)) of such
corporation; (iv) any dividend received from a corporation which is a controlled foreign
corporation of such domestic corporation; (v) any domestic oil and gas extraction
income of such corporation; and (vi) any foreign branch income (as defined in section
904(d)(2)(J) and Treas. Reg. § 1.904-4(f)(2)).

Section 250(b)(4) defines the term FDDEI to mean, with respect to any taxpayer for any
taxable year, any DEI of such taxpayer which is derived in connection with (A) property,
which is sold by the taxpayer to any person who is not a United States person, and
which the taxpayer establishes to the satisfaction of the Secretary is for a foreign use, or
(B) services provided by the taxpayer which the taxpayer establishes to the satisfaction
of the Secretary are provided to any person, or with respect to property, not located
within the United States.

Treas. Reg. § 1.250(b)-5(b) provides that if only a portion of a service is treated as
provided to a person, or with respect to property, outside the United States, the
provision of the service is a FDDEI service only to the extent of the gross income
derived with respect to such portion. Treas. Reg. § 1.250(b)-5(b) breaks services into
five specified categories to determine whether the provision of a service generates
FDDEI. One such category is general services provided to business recipients located
outside the United States.

A business recipient is a recipient other than an individual consumer and includes all
related parties of the recipient, but cannot include the service renderer. Treas. Reg. §
1.250(b)-5(c)(3) and (4). Treas. Reg. § 1.250(b)-5(e)(1) provides that a general service
provided to a business recipient generates FDDEI to the extent the service confers a
benefit on the business recipient’s operations outside the United States. Under the
general rule of Treas. Reg. § 1.250(b)-5(e)(1), in determining the location of the benefit,
the place of residence, incorporation or formation of the business recipient is not
relevant. Rather, the rule depends on the location of the business operations that
PLR-107583-24                                  5

benefit from the service. Under Treas. Reg. § 1.250(b)-5(e)(3)(i), a business recipient is
treated as having operations where it maintains an office or other fixed place of
business.

Treas. Reg. § 1.250(b)-5(e)(2) provides that the principles of Treas. Reg. § 1.482-9
apply for purposes of determining which operations of the business recipient (and its
related parties located outside the United States) benefit from a general service. The
determination under Treas. Reg. § 1.482-9 is made by treating the service renderer as
one controlled taxpayer, and the business recipient’s operations within and outside the
United States as separate controlled taxpayers respectively. The extent to which a
business recipient’s operations within or outside of the United States are treated as one
or more separate controlled taxpayers is determined under any reasonable method,
consistent with the principles of Treas. Reg. § 1.482-9(k), treating the service renderer’s
gross income from the services provided to the business recipient as if it were a “cost”
as that term is used in § 1.482-9(k). Reasonable methods may include, for example,
allocations based on time spent or costs incurred by the renderer or sales, profits, or
assets of the business recipient. The determination is made when the service is
provided based on information obtained from the business recipient or on the renderer’s
own records (such as time spent working with the business recipient’s offices located
outside the United States).

For this purpose, the term “benefit” is defined in Treas. Reg. § 1.482-9(l)(3)(i), which
provides that an activity is considered to provide a benefit to the recipient if the activity
directly results in a reasonably identifiable increment of economic or commercial value
that enhances the recipient's commercial position, or that may reasonably be
anticipated to do so. An activity is generally considered to confer a benefit if, taking into
account the facts and circumstances, an uncontrolled taxpayer in circumstances
comparable to those of the recipient would be willing to pay an uncontrolled party to
perform the same or similar activity on either a fixed or contingent-payment basis, or if
the recipient otherwise would have performed for itself the same activity or a similar
activity. A benefit may result to an owner of intangible property if the renderer engages
in an activity that is reasonably anticipated to result in an increase in the value of that
intangible property.

Under Treas. Reg. § 1.482-9(l)(3)(ii), an activity is not considered to provide a benefit to
a recipient if, at the time the activity is performed, the present or reasonably anticipated
benefit is so indirect or remote that the recipient would not be willing to pay for the
activity and would not be willing to perform the activity itself. Further, under Treas. Reg.
§ 1.482-9(l)(3)(iii), (iv) and (v), recipients are not treated as benefitting from duplicative
activities, shareholder activities or from passive association. If an activity performed by
a controlled taxpayer duplicates an activity that is performed, or that reasonably may be
anticipated to be performed, by another controlled taxpayer on or for its own account,
the activity is generally not considered to provide a benefit to the recipient. A
shareholder activity also does not provide a benefit if the sole effect is either to protect
the renderer's capital investment in the recipient or in other members of the controlled
PLR-107583-24                                 6

group, or to facilitate compliance by the renderer with reporting, legal, or regulatory
requirements applicable specifically to the renderer, or both. With respect to passive
association, a controlled taxpayer generally is not considered to obtain a benefit if that
benefit results from the controlled taxpayer's status as a member of a controlled group.

                                        ANALYSIS

USR&DCo1 and USR&DCo2 provide general services to ForeignOpCo, a business
recipient as defined in Treas. Reg. § 1.250(b)-5(c)(3). As a related party of
ForeignOpCo that is not rendering the service, USDistributor is also potentially a
business recipient (subject to whether it receives a benefit from the R&D Services). The
USR&DCos are not the recipients of services but only render services.

ForeignOpCo has a fixed place of business in Country A, and is a business recipient
under Treas. Reg. § 1.250(b)-5(e)(3)(i), treated as having operations solely in Country
A. ForeignOpCo has been operating in Country A for many years, maintains offices and
factories in Country A, and has no significant operations outside of Country A.
ForeignOpCo’s manufacturing and other activities are conducted outside of the United
States, while USDistributor performs its marketing and distribution activities solely within
the United States. The group’s operations outside of Country A are conducted through
local subsidiaries or third parties, including for example, using the USR&DCos to
perform the R&D Services or third party manufacturers in some instances to
manufacture the products outside of Country A. Therefore, under Treas. Reg. §
1.250(b)-5(e), the R&D Services may be treated as FDDEI services (at least in part, per
Treas. Reg. § 1.250(b)-5(b)).

In determining which operations of the two potential business recipients, ForeignOpCo
and USDistributor, benefit from the R&D Services, USDistributor is treated as a
separate controlled taxpayer from ForeignOpCo applying the principles of Treas. Reg. §
1.482-9. To determine whether a business recipient’s operations are treated as one or
more separate controlled taxpayers, Treas. Reg. § 1.250(b)-5(e)(2) provides that any
reasonable method may be applied, provided it is consistent with the principles of
Treas. Reg. § 1.482-9(k).

In this case, ForeignOpCo contracts with the USR&DCos for the R&D Services.
ForeignOpCo directs the development of the products and is the sole owner of the
Product IP that is developed or enhanced by the R&D services. ForeignOpCo pays an
arm’s length price for the R&D services and uses the Product IP developed from the
R&D Services to manufacture products for distribution. ForeignOpCo, USR&DCos and
USDistributor are the only parties directly involved in the supply chain relating to the
development of the Product IP and its distribution. No other US or foreign affiliates are
directly involved or pay any of the costs for developing the Product IP. The R&D
Services, therefore, directly result in a reasonably identifiable increment of economic or
commercial value that enhances ForeignOpCo’s commercial position under Treas. Reg.
§ 1.482-9(l)(3)(i), and confer a benefit on its operations.
PLR-107583-24                                 7


The principles of Treas. Reg. § 1.482-9 also apply to determine whether the R&D
Services provide any benefit to USDistributor. The R&D Services performed by the
USR&DCos would confer a benefit on USDistributor if they directly result in a
reasonably identifiable increment of economic or commercial value that enhances
USDistributor’s commercial position, or that may reasonably be anticipated to do so
under Treas. Reg. § 1.482-9(l)(3)(i); or generally, if taking into account the facts and
circumstances, an uncontrolled taxpayer in circumstances comparable to those of
USDistributor would be willing to pay an uncontrolled party to perform the R&D Services
on either a fixed or contingent-payment basis (or if USDistributor would have performed
the R&D Services for itself).

Under the facts as represented, the R&D Services provided by the USR&DCos do not
directly result in any benefit to USDistributor under the principles of Treas. Reg. §
1.482-9(l)(3). USDistributor pays ForeignOpCo an arm’s length price for finished
products developed from the Product IP. Also, all rights and title to the Product IP
created or enhanced by the R&D Services vest solely in ForeignOpCo. ForeignOpCo
grants to USDistributor a royalty-free license to use its trademarks, but solely for
purposes of distributing products in the United States. The distribution agreement is
also terminable at will by both ForeignOpCo and USDistributor. Thus, as a limited-risk
distributor of the finished products, USDistributor does not obtain any ownership rights
or title in the IP that is (or is reasonably anticipated to be) directly enhanced by the R&D
Services, nor does it bear any risk of loss with respect to unsuccessful R&D Services
that do not result in finished products reaching the US market.

Under these circumstances, any benefit that USDistributor may receive as a distributor
of the ultimate products that result from the R&D Services is only indirect because the
R&D Services do not result in a reasonably identifiable increment of economic or
commercial value that enhances its commercial position, applying the principles of
Treas. Reg. § 1.482-9. Based on these particular facts, USDistributor’s operations are
no different from that of an uncontrolled taxpayer purchasing products at arm’s length
from an unrelated party (with no ownership rights in IP incorporated in such products)
and distributing those products to unrelated US customers. Under those circumstances,
an uncontrolled taxpayer would not receive any direct benefit from IP incorporated in the
purchased products.

Applying the principles of Treas. Reg. § 1.482-9, USDistributor’s operations are not
considered to benefit from the R&D Services and, as a result, the costs of the R&D
Services are not allocated between ForeignOpCo and USDistributor under Treas. Reg.
§ 1.482-9(k). ForeignOpCo, whose operations are entirely outside of the United States,
is therefore the sole business recipient of the R&D Services under Treas. Reg. §
1.250(b)-5(c)(3). Thus, for purposes of Treas. Reg. § 1.250(b)-5(e)(2), the R&D
Services may be treated as FDDEI services in full.
PLR-107583-24                                        8

                                                 RULING

Accordingly, based solely on the facts and representations stated above, we rule as
follows:

The income earned by USR&DCo1 and USR&DCo2 solely from the provision of the
R&D Services to ForeignOpCo may be treated as gross FDDEI in full under section
250(b)(4)(B) and the accompanying regulations.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent. Except as expressly provided
herein, no opinion is expressed or implied concerning the tax consequences of any
aspect of any transaction or item discussed or referenced in this letter, or facts resulting
from the proposed transactions that are not specifically covered by the above ruling.

                                               Sincerely,



                                               Brad McCormack
                                               Senior Technical Reviewer, Branch 6
                                               (International)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes

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