Final Cloud Regulations: Classification of Digital and Cloud Transactions, Implementation, Proposed Sourcing Regs

On Jan. 10, 2025, the Treasury and IRS issued final regulations under Section 861 covering digital and cloud transactions. The final regulations, effective 90 days after the date of issue, include several significant revisions to the prior proposed regulations.

One notable change in the final regulations is the replacement of the prior de minimis rule for determining the category of cloud transactions with a rule for determining a transaction's "predominant character." The preceding rule divided a transaction into separate parts when it consisted of multiple transactions. Now, under the final regulations, taxpayers must characterize mixed transactions based on their overall character as digital content or cloud transactions. New methods are in place for determining the predominant character, including a general rule and a special rule. This latest definition could create disparity with guidelines in foreign countries that employ rules related to separate transactions or otherwise do not utilize a primary character determination.

Along with the final regulations, proposed regulations for sourcing income from cloud transactions have been released. These regulations include a complex three-part calculation for determining the source of income, which takes into account the location of a business' employees and both tangible and intangible assets. Tax practitioners working with companies that sell digital and cloud content need to understand the ramifications of the recently released final and proposed regulations.

Listen as our panel of experienced international tax attorneys examines the recently released final regulations and discusses the proposed regulations for determining the source of income from cloud arrangements. The panel will outline key components of the final regs and provide guidance on implementing the new requirements.

I. Cloud regulations: introduction

II. Definitions

III. Final regulations

IV. Proposed regulations

V. IRS Notice 2025-6 

VI. Implementation

VII. Examples

The panel will cover these and other critical issues:

• Determining the predominant character of digital transactions
• Key modifications made to the prior proposed regulations under the final regulations
• Rules contained in the newly proposed regulations for sourcing income
• Guidelines for implementing the key requirements of the final cloud regulations

Learning Objectives

After completing this course, you will be able to:

• Identify digital and cloud arrangements
• Determine the effective date of the final cloud regulations
• Decide how best to implement new requirements under the final regulations
• Ascertain differences between the prior proposed regulations and final regulations

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite:

  Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of international taxation including residency determination, foreign entity classifications, application of treaty benefits, as well as GILTI, Subpart F, and the related Section 250 deductions.

  
  

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Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).