Section 367 foreign transfer tax rules: What US taxpayers must know in 2026

Section 367 can turn an otherwise tax-free corporate exchange into a taxable event when a US person moves property, stock, or intangible assets across the US border. For a transfer completed in 2025, the reporting may include Form 926, a gain recognition agreement, Form 5471, or a Section 367(b) notice filed with the 2025 return in 2026.

This rule remains relevant even when no cash changes hands. A founder who contributes appreciated property to a newly formed foreign company may recognize gain immediately, while a transfer of intellectual property can create annual ordinary-income inclusions under Section 367(d).

The tax result depends on which subsection applies. Section 367(a) addresses outbound property transfers, Section 367(b) governs specified reorganizations involving foreign corporations, Section 367(d) applies to intangible property, and Section 367(e) covers certain liquidations and distributions.

What is Section 367? Overview and purpose of foreign transfer tax rules

Section 367 of the Internal Revenue Code prevents US taxpayers from using tax-free corporate provisions, including Sections 351, 354, 361, and 368, to move appreciated property or deferred corporate earnings outside US taxing jurisdiction without an immediate or continuing US tax consequence.

Section 367 acts as a toll charge on outbound transfers by allowing the IRS to tax built-in gain before property leaves US jurisdiction or to require continuing income inclusions after the transfer. Code Section 367 does not impose one uniform tax. Its 4 main subsections apply different rules according to the asset and transaction.

The following 4 subsections form the core of the foreign transfer tax regime:

1. Section 367(a) generally requires gain recognition when a US person transfers property to a foreign corporation in an exchange that would otherwise qualify for nonrecognition.
2. Section 367(b) addresses specified inbound reorganizations, foreign-to-foreign transfers, and other exchanges in which preserving earnings, profits, basis, or Section 1248 exposure is necessary.
3. Section 367(d) treats an intangible property transfer as a series of deemed contingent payments tied to the property’s productivity, use, or disposition.
4. Section 367(e) applies special rules to specified liquidations and distributions involving foreign corporations.

The statutory rules appear in IRC Section 367. Certain transfers must also be disclosed on IRS Form 926, even when a treaty, regulation, or gain recognition agreement changes the immediate income result. (irs.gov)

A foreign corporation created after an outbound transfer may also become a controlled foreign corporation. That classification can add annual Form 5471, Subpart F, and GILTI reporting after the initial IRC Section 367 transaction.

The US foreign transfer tax describes these federal rules in practical terms, but Section 367 is not a separate tax form or flat-rate levy. The taxpayer must calculate the income consequence under the applicable subsection and then complete the related return disclosures.

Section 367(a) – Outbound transfers of property to foreign corporations

Under Section 367(a), a US person transferring property to a foreign corporation in an otherwise tax-free exchange generally recognizes gain as if the property were sold for fair market value on the 2025 transfer date. Loss is not recognized merely because another transferred asset has declined in value.

Section 367(a), sometimes written as Sec. 367(a) or 367(a), overrides nonrecognition when the transferee is foreign. A tax-free exchange with a foreign corporation under Section 351 or a corporate reorganization can therefore produce current gain even though the same transaction between 2 domestic corporations would not.

The following 5 points determine how the outbound transfer rule applies:

• Triggering transaction: A US person transfers property to a foreign corporation in an exchange covered by Sections 332, 351, 354, 356, or 361.
• General gain rule: Built-in gain is recognized using the property’s fair market value minus its adjusted tax basis.
• Stock and securities rules: Certain stock transfers can remain nonrecognition transactions when the requirements of Treasury Regulation §1.367(a)-3 are met, sometimes through a gain recognition agreement.
• Tainted property: Special treatment applies to categories such as inventory, installment obligations, foreign currency, and property transferred for use by the foreign corporation in the United States.
• Reporting: Form 926 and supporting statements normally document the outbound asset transfer and the amount of gain, if any.

For transfers after December 31, 2017, Congress repealed the broad active trade or business exception previously found in Section 367(a)(3). The current Form 926 instructions state that transfers of tangible property, apart from specified stock transfers and other narrow rules, are subject to full gain recognition under Section 367(a)(1). (irs.gov)

 

 

The TFX guide to Form 926 explains which US transferors must report a foreign corporation transfer. The reporting requirements for outbound transfers should be reviewed before the return is filed because the tax form requires transaction-level details, ownership information, basis, fair market value, and the type of property transferred.

Gain recognition agreement – How it works and when you need one

A gain recognition agreement is an IRS filing under Treasury Regulation §1.367(a)-8 that can defer gain on a qualifying outbound stock or securities transfer for 5 full taxable years after the transfer year. It does not generally shelter transfers of equipment, real estate, inventory, or intellectual property.

A GRA is most relevant when a US person completes a stock transfer to a foreign entity and cannot meet a direct exception under Treasury Regulation §1.367(a)-3. The transferor agrees to recognize the deferred gain if a specified gain recognition agreement triggering event occurs during the monitoring period.

The following 5 requirements describe the standard GRA process:

1. Eligible transferor: The US transferor must have a transaction covered by the outbound stock or securities regulations and must identify the transferred stock, basis, fair market value, and built-in gain.
2. Five-year term: The agreement generally covers 5 full taxable years following the close of the taxable year in which the initial transfer occurred.
3. Triggering events: A sale, exchange, liquidation, redemption, reorganization, or other disposition involving the transferred stock or substantially all relevant corporate assets can accelerate the deferred gain.
4. Annual certification: The transferor must file a certification for each of the 5 full taxable years, even when no triggering event occurred.
5. Assessment-period consent: Form 8838 is commonly used to extend the period for assessing tax connected with the GRA.

A complete gain recognition agreement form package is attached to the transferor’s timely filed federal return, including extensions. The filing normally includes the agreement, representations required by the regulations, supporting ownership details, and Form 926.

 

 

A late or incomplete filing does not always cause automatic and permanent loss of GRA treatment. Treasury Regulation §1.367(a)-8 contains relief procedures for certain failures that were not willful, but relief is fact-dependent and should not be assumed after the deadline.

Taxpayers with a GRA frequently have continuing Form 5471 reporting for the foreign corporation. The GRA and Form 5471 serve different purposes, so filing one does not replace the other.

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Section 367(b) – Inbound and foreign-to-foreign transfers

Section 367(b) applies to specified corporate exchanges that are not treated as outbound property transfers under Section 367(a), including inbound reorganizations and foreign-to-foreign transfers. Depending on ownership and transaction type, the rules can require a current dividend inclusion, basis adjustment, or preservation of Section 1248 exposure.

The rules in 367(b), IRC Section 367(b), and Treasury Regulation §1.367(b) focus on deferred foreign corporate earnings and tax attributes. They prevent those amounts from disappearing when stock or assets move through an otherwise tax-free restructuring.

An inbound reorganization may occur when a foreign corporation merges into, liquidates into, or transfers assets to a domestic corporation. In specified cases, a US shareholder must include an “all earnings and profits amount,” generally reflecting untaxed earnings attributable to the shareholder’s foreign stock.

A foreign-to-foreign transfer can trigger a Section 1248 amount when a US shareholder’s potential dividend treatment would not be preserved after the exchange. Section 1248 generally recharacterizes part of the gain on certain CFC stock as a dividend to the extent of attributable earnings and profits.

The 367(b) result is not automatically based on a universal 10% ownership test. The applicable shareholder category, ownership period, CFC status, exchange provision, and post-transaction ownership must be tested under the regulation governing that transaction.

A Section 962 election can affect how an individual US shareholder is taxed on separate CFC inclusions, but it does not cancel an amount required under Section 367(b). Each tax rule must be calculated independently.

Section 367(b) notice requirements and the 367(b) statement

A person subject to the Section 367(b) notice rules must attach the statement to a timely filed federal return, including extensions, for the year in which income is realized. When Form 5471 is required, the notice generally must also be attached to that form for the same tax year.

The Section 367 statement is not a standardized IRS form. It is a taxpayer-prepared disclosure containing the facts and calculations required by Treasury Regulation §1.367(b)-1(c), including any income inclusion or adjustment resulting from the exchange.

The following 5 categories of information normally belong in the 367(b) statement:

1. A declaration that the exchange is a Section 367(b) exchange.
2. A complete description of the transaction and the participating corporations.
3. A description of the stock, securities, assets, cash, or other consideration transferred and received.
4. The amount of income, loss, basis adjustment, earnings-and-profits adjustment, or other tax-attribute adjustment.
5. Information required under the applicable nonrecognition and international reporting provisions that has not been supplied elsewhere.

The official regulations require the notice to accompany a timely return, including extensions. They also specify attachment to Form 5471 when the US person is required to file that form. (irs.gov)

Taxpayers can review the IRS requirements for Form 5471 and the separate consequences described in the TFX guide to Form 5471 penalties. A 367(b) statement does not replace schedules required by Form 5471.

Treas. Reg. §1.367(b) is sometimes displayed in research tools as §1.367(b) or shortened to 1.367(b). The heading “1367 b” found in unformatted databases usually refers to that same regulation, not a separate Code provision.

Section 367(d) – Transfers of intangible property to foreign corporations

Section 367(d) applies when a US person transfers intangible property to a foreign corporation in a Section 351 or 361 exchange. Rather than recognizing the entire gain once, the transferor is generally treated as receiving annual arm’s-length payments over the property’s useful life, with ordinary-income treatment.

The deemed payments must be commensurate with the income attributable to the transferred property. This allows the IRS to adjust the amount when the original valuation does not match the income, use, or commercial performance later associated with the intangible.

IRC §367(d), also written as 367(d) or Section 367(d), covers more than patents and trademarks. The post-2017 statutory definition includes goodwill, going-concern value, workforce in place, methods, programs, systems, customer-based value, and other property whose value is not attributable to tangible property or an individual’s services.

The following 5 assets can fall within an intangible property transfer:

• Patents, inventions, formulas, designs, and technical know-how.
• Copyrights, literary works, software, and similar protected content.
• Trademarks, trade names, brands, and franchises.
• Customer lists, contracts, supplier relationships, and workforce in place.
• Goodwill, going-concern value, operating systems, and other nonphysical business value.

The rules are designed to prevent the expatriation of intangibles without an appropriate US income inclusion. The taxpayer must identify the arm’s-length charge, useful life, valuation method, projected income, and later events that affect the deemed-payment stream.

A taxpayer may elect a 20-year inclusion period for specified intangible transfers by filing the required statement on a timely return. Without that election, annual inclusions can continue for the property’s full useful life, including an indefinite period when the facts support it.

Final regulations effective for covered dispositions on or after October 10, 2024, added rules for certain repatriations of transferred intangibles to qualified domestic persons. When all requirements and reporting conditions are met, a qualifying domestic repatriation can terminate continuing annual inclusions under IRC Section 367(d). (irs.gov)

For 2026, IRS Notice 2026-7 also addresses corporate alternative minimum tax financial-statement-income adjustments involving Section 367(d). That notice mainly concerns corporations within the CAMT regime rather than a typical individual founder, but it should be reviewed when a large corporate group completes a cross-border restructuring.

See the TFX discussion of foreign-derived intangible income and GILTI regulations for the separate rules that can apply after intellectual property is held or used by a foreign subsidiary.

Section 367(a) vs. 367(b) vs. 367(d) – Key differences at a glance

Sections 367(a), 367(b), and 367(d) address 3 different tax risks: untaxed appreciation leaving the United States, deferred foreign earnings disappearing in a reorganization, and intangible value moving offshore without arm’s-length compensation. The correct subsection depends on the property and legal steps, not the transaction’s business label.

The main decision rule is that tangible property and specified stock transfers start with 367(a), restructuring and earnings issues start with 367(b), and transferred intellectual property starts with 367(d).

 

The TFX guide to additional filing requirements for taxpayers with non-US corporations explains why Form 926, Form 5471, Form 8858, and other filings can overlap. One cross-border corporate restructuring can require several forms because each form reports a different tax relationship.

Outbound transfers and the active trade or business exception

The active trade or business exception no longer applies to a 2025 outbound transfer of tangible property. Congress repealed Section 367(a)(3) for transfers after December 31, 2017, so using equipment or other assets in an active foreign operation does not by itself prevent immediate gain recognition.

Before 2018, the former exception could protect qualifying property transferred for use in an active trade or business outside the United States. Historical articles may still state that the foreign corporation must use the asset abroad for at least 5 years, but that is not the current rule.

For a 2025 transaction, the taxpayer must instead examine the remaining Section 367 exceptions and property-specific regulations. Those include rules for certain stock and securities transfers, limited exchanges involving the same foreign corporation, and qualifying GRAs.

Tainted property rules remain relevant when classifying transferred assets. Inventory, installment obligations, foreign currency, and property connected with US use can produce current income under separate provisions even where another nonrecognition rule would otherwise apply.

The IRS expressly confirms the repeal in the Form 926 instructions. Taxpayers operating foreign companies should also review the TFX guide to foreign company tax reporting before relying on an older active-business analysis. (irs.gov)

IRS Form 926 – Reporting outbound transfers under Section 367

IRS Form 926 reports specified transfers of tangible property, intangible property, cash, and stock to a foreign corporation. A US transferor generally files it with the return for the 2025 transfer year, including a valid extension, and reports the property’s basis, fair market value, and applicable Section 367 treatment.

Potential filers include US citizens, resident aliens, domestic corporations, domestic estates, and domestic trusts. Partnerships do not usually file Form 926 at the entity level for a partner-level transfer, but reporting can pass through to domestic partners according to the transaction and ownership rules.

The following 4 transfer categories should be tested for Form 926 reporting:

• A transfer of tangible or intangible property to a foreign corporation.
• A transfer of stock or securities in a transaction covered by the Section 367 regulations.
• A cash transfer when the transferor owns at least 10% after the transaction.
• Cash transfers exceeding $100,000 during the applicable 12-month period, even when the 10% ownership test is not met.

The transferor should disclose each property category rather than entering a single net figure. The form asks for the transfer date, description, adjusted basis, fair market value, recognized gain, transferee identity, foreign country, ownership percentage, and legal provision governing the exchange.

A taxpayer who owns a dormant company is not automatically exempt. The TFX dormant foreign corporation guide explains why a company with little or no business activity can still create Form 5471 and other international information-return duties.

The Section 6038B penalty for failing to report a covered transfer is generally 10% of the property’s fair market value. The penalty is capped at $100,000 unless the failure resulted from intentional disregard, and reasonable-cause relief can apply when supported by the facts.

 

Triangular reorganizations and Section 367(b) anti-abuse rules

A triangular reorganization uses at least 3 corporations: a parent, its subsidiary, and a target. Section 367(b) and Treasury Regulation §1.367(b)-10 can require adjustments when a foreign subsidiary acquires parent stock or property and uses it to acquire another corporation in a cross-border reorganization.

In a standard triangular structure, the subsidiary acquires the target while issuing or transferring parent stock as consideration. The tax analysis must trace how the subsidiary obtained that stock, whether property moved to the parent, and whether foreign earnings or basis could otherwise escape US taxation.

The following 3 parties normally appear in the structure:

1. Parent corporation: The corporation whose stock is used in the acquisition.
2. Acquiring subsidiary: The entity that acquires the target’s stock or assets.
3. Target corporation: The corporation whose shareholders or assets participate in the reorganization.

Treasury Decision 10004, published July 18, 2024, finalized regulations covering specified triangular reorganizations and inbound nonrecognition transactions. The rules can create deemed distributions, deemed contributions, earnings-and-profits adjustments, and added Section 367(b) notice information.

The regulations address structures sometimes described as “Killer B” transactions, but that label should not replace transaction-specific analysis. Not every triangular reorganization produces the same deemed steps or income result.

Historical earnings may also interact with the Section 965 transition tax. Previously taxed earnings and profits, Section 1248 amounts, stock basis, and post-transaction ownership must be reconciled before computing a Section 367(b) inclusion.

Section 367 and controlled foreign corporations – Key interactions

Section 367 and the controlled foreign corporation rules can apply to the same structure but tax different events. The initial 2025 transfer may create immediate gain or a deemed-payment stream, while later tax years can produce Subpart F or GILTI inclusions when US shareholders own more than 50% of the foreign corporation.

A controlled foreign corporation is generally a foreign corporation more than 50% owned, by vote or value, by US shareholders after applying the statutory ownership and attribution rules. For 2025, a US shareholder generally means a US person owning at least 10% of vote or value.

The initial foreign transfer tax result does not eliminate the foreign corporation’s later annual reporting. A US transferor might file Form 926 for the contribution, Form 5471 for CFC ownership, and Form 8992 for the GILTI calculation.

These are separate tax events rather than automatic double taxation of one amount. Proper basis and previously taxed earnings and profits records help prevent the same earnings from being taxed twice when later distributions or stock dispositions occur.

A basis adjustment for foreign stock can arise under Section 367(b), Section 961, or other provisions. The adjustment must be tied to the specific income inclusion and cannot be assumed from the fact that tax was paid somewhere in the structure.

Taxpayers claiming the GILTI high-tax exception must apply a separate set of tests. That election does not reverse gain already recognized under Sec. 367 or cancel a continuing Section 367(d) inclusion.

Foreign branch loss recapture after Section 367(a) – Current Section 91 rule

For post-2017 transactions, foreign branch loss recapture is governed principally by Section 91 rather than former Section 367(a)(3)(C). A domestic corporation may have to include its transferred loss amount when it transfers all branch assets substantially to a specified 10%-owned foreign corporation and remains a US shareholder afterward.

Congress added Section 91 when it repealed the former active trade or business exception. The rule targets branch losses that previously reduced US taxable income before the related business assets were moved into a foreign corporation.

The following 4 conditions are central to the current rule:

• The transferor is a domestic corporation.
• Substantially all assets of a foreign branch are transferred.
• The transferee is a specified 10%-owned foreign corporation.
• The domestic corporation is a US shareholder of the transferee immediately after the transfer.

The transferred loss amount is based on specified branch losses previously deducted, reduced by later branch income and other statutory adjustments. The calculation is separate from gain recognized under Section 367(a)(1), although both amounts may arise in the same transaction.

A sole individual operating abroad through a disregarded foreign branch may face different consequences from a domestic corporation. The TFX guide to capital gains and losses provides background on basis and recognized gain, but Section 91 requires a corporate and branch-specific calculation.

The Form 926 instructions require a detailed year-by-year computation of the transferred loss amount and expressly identify Section 91 as the replacement for the former branch-loss provision. (irs.gov)

Section 367 penalties and consequences of noncompliance

A failure to report a covered 2025 transfer on Form 926 can produce a penalty equal to 10% of the property’s fair market value, generally capped at $100,000 unless intentional disregard applies. Separate failures involving a GRA, Form 5471, or Section 367(b) notice can create additional tax, interest, and penalties.

The Form 926 penalty is based on transferred value, not 25% of recognized gain. For example, an unreported asset worth $800,000 creates an initial 10% calculation of $80,000, even if its built-in gain is far lower.

The following 5 consequences may arise from incomplete Section 367 compliance:

• A Section 6038B penalty equal to 10% of transferred property value.
• Recognition of gain that the taxpayer expected to defer under a GRA.
• Interest on the tax connected with a triggering event or failed agreement.
• Separate Form 5471, Form 8858, or other international information-return penalties.
• An extended assessment period under Section 6501(c)(8) for tax items related to missing international information.

The statute of limitations does not necessarily remain open forever after the missing information is supplied. Section 6501(c)(8) generally keeps the assessment period open until the required information is furnished and then for 3 additional years, subject to reasonable-cause and scope rules.

Intentional disregard removes the normal $100,000 cap on the Form 926 penalty. A taxpayer seeking reasonable-cause relief should document what happened, the steps taken to comply, the advice received, when the problem was discovered, and how it was corrected.

A taxpayer whose conduct may have been willful should obtain individualized advice before submitting an amended return or delinquent international form. The TFX overview of Form 14457 and the IRS voluntary disclosure practice explains a separate route intended for potential willful noncompliance.

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Worked example – Section 367(a) outbound transfer and GRA treatment

A GRA normally applies to qualifying transfers of foreign corporate stock or securities, not software itself. In this 2025 example, property with a $50,000 basis and $500,000 value produces a potential $450,000 built-in gain, but the correct subsection depends on whether the transferred asset is stock or intellectual property.

Based on our client scenario at TFX: A US software founder contributes proprietary software with a $50,000 tax basis and a $500,000 arm’s-length value to a newly formed Irish corporation in exchange for all its shares.

Because the transferred property is software, the transaction is analyzed under IRC Section 367(d), not protected by a gain recognition agreement. The founder is generally treated as receiving annual deemed contingent payments based on the software’s income potential and must report the intangible transfer on Form 926.

The following calculation shows the value moved offshore:

• Fair market value of software: $500,000
• Adjusted tax basis: $50,000
• Built-in appreciation: $450,000
• Immediate Section 367(a) gain protected by a GRA: $0, because a GRA is not the governing mechanism for the software transfer
• Section 367(d) treatment: Annual ordinary-income inclusions determined under arm’s-length principles

Assume instead that the founder transfers appreciated stock of an existing foreign corporation with the same $50,000 basis and $500,000 value to another foreign corporation in a qualifying Section 351 exchange. The potential Section 367(a) gain would be $450,000, and a properly filed GRA could defer that amount if the stock-transfer regulations are satisfied.

A later sale or liquidation during the GRA term could become a triggering event. The founder would then recognize the deferred gain, subject to the regulation’s timing, basis, and interest rules.

The transaction is not a Section 1031 exchange. The TFX guide to like-kind exchanges under IRC Section 1031 explains that Section 1031 now applies only to qualifying real property and does not replace the corporate transfer rules.

Section 351 and Section 367 – How they interact

Section 351 normally permits a tax-free contribution of property to a corporation when the transferors control at least 80% immediately after the exchange. When the transferee is foreign, Section 367 can override that nonrecognition treatment or replace it with continuing income inclusions and separate reporting requirements.

A Section 351 exchange therefore requires a 2-step analysis. First, determine whether the transferors satisfy Section 351, including the 80% control test. Second, apply Section 367(a) to tangible property and stock or Section 367(d) to intangible property.

The Section 351 reporting requirements can include Form 926, a transaction statement, valuation support, a GRA for eligible stock, and continuing international forms based on the resulting ownership. Section 351 qualification alone does not remove those filings.

If the transferee is a foreign partnership rather than a corporation, Section 367 is not the primary transfer rule. The taxpayer should instead review Form 8865 and foreign partnership reporting, together with Sections 721, 704(c), and 721(c).

Corporate classification must be confirmed before applying either set of rules. A foreign entity that is disregarded or treated as a partnership for US tax purposes can produce a different result from the entity’s local legal classification.

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Section 367 reporting deadlines and compliance checklist

For a calendar-year individual, the regular deadline for a 2025 federal return is April 15, 2026. Qualifying taxpayers living abroad receive an automatic filing extension to June 15, 2026, while a timely Form 4868 generally extends the return and attached Section 367 filings to October 15, 2026.

The IRS’s 2026 filing calendar confirms April 15, June 15, and October 15 as the principal dates for 2025 individual returns and extensions. An extension to file does not extend the time to pay tax due for 2025. (irs.gov)

The following 8-item checklist covers the main filing steps:

• Classify the transferee: Confirm whether the foreign entity is a corporation, partnership, or disregarded entity for US tax purposes.
• Identify the governing subsection: Apply Section 367(a), 367(b), 367(d), or 367(e) according to the assets and legal transaction.
• Value transferred property: Retain a supportable fair market value and adjusted-basis calculation as of the transfer date.
• Complete Form 926: Attach it to the timely federal return when Section 6038B reporting applies.
• Prepare the GRA: File the initial agreement and Form 8838 with a timely return when a qualifying stock transfer uses GRA treatment.
• Track annual certifications: File each required GRA certification for the 5 full taxable years following the initial transfer year.
• Attach the Section 367(b) notice: Include it with the return and Form 5471 when the applicable regulations require both attachments.
• Complete related forms: Review Forms 5471, 8858, 8992, 1118, and other international schedules based on the post-transfer structure.

A taxpayer holding a foreign branch through a disregarded entity should review Form 8858 reporting. Form 8858 does not replace Form 926 when a reportable transfer converts or moves the branch business into a foreign corporation.

Late GRA relief or reasonable-cause penalty relief may be available, but neither is automatic. A request should identify the specific failure, explain why it was not willful, provide the missing documents, and follow the applicable regulation or IRS procedure.

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