Cost-Sharing Arrangements

Method By Which Related Parties May Cooperated to Develop Intangible Property and Attribute Cost Proportionately To Anticipated Benefits

Entities seeking to develop intangible property may enter into cost-sharing arrangements, which allow the parties to the agreement to attribute proportional shares of costs relating to the development of intangible property based on their anticipated share of the benefits to be derrived from that property. Cost-sharing arrangements have been particularly popular among U.S. software developers with affiliated entities abroad. In some countries, as well as in the OECD guidelines, cost-sharing arrangements are referred to as cost-contribution arrangements.The IRS issued new proposed cost-sharing regulations in 2005, which have drawn sharp criticism from many business groups. Until those proposed regulations are finalized, the current regulations, described in 26CFR 1.482-7, remain in effect:

(a) In general--(1) Scope and application of the rules in this
section. A cost sharing arrangement is an agreement under which the
parties agree to share the costs of development of one or more
intangibles in proportion to their shares of reasonably anticipated
benefits from their individual exploitation of the interests in the
intangibles assigned to them under the arrangement. A taxpayer may claim
that a cost sharing arrangement is a qualified cost sharing arrangement
only if the agreement meets the requirements of paragraph (b) of this
section. Consistent with the rules of Sec. 1.482-1(d)(3)(ii)(B)
(Identifying contractual terms), the district director may apply the
rules of this section to any arrangement that in substance constitutes a
cost sharing arrangement, notwithstanding a failure to comply with any
requirement of this section. A qualified cost sharing arrangement, or an
arrangement to which the district director applies the rules of this
section, will not be treated as a partnership to which the rules of
subchapter K apply. See Sec. 301.7701-3(e) of this chapter. Furthermore,
a participant that is a foreign corporation or nonresident alien
individual will not be treated as engaged in trade or business within
the United States solely by reason of its participation in such an
arrangement. See generally Sec. 1.864-2(a).

Here is a pdf of the complete cost-sharing regulations: 26 CFR 1.482.

Cost-sharing agreements are further discussed in the following articles:

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