OBBB Strategy: How to Deduct Foreign Development — Even If It Doesn’t Qualify for R&D Expensing

A smart workaround for tech founders with offshore teams

The Problem: Not All R&D Is Created Equal

Under the One Big Beautiful Bill, U.S. companies can now fully expense qualified domestic R&D under new IRC §174A — but there’s a catch: Only R&D performed inside the U.S. qualifies for this immediate deduction.

That means if you're using offshore developers — say in Ukraine, India, or Latin America — those wages don’t qualify for §174 expensing, even if the work is mission-critical.

The Strategy: License Back the IP, Deduct the Fees

Here’s how smart founders are getting around it:

Step 1: Set up an offshore subsidiary

  • The entity employs your foreign dev team

  • It owns the code or IP initially created abroad

  • It charges your U.S. company a licensing fee or cost-plus development fee

Step 2: Your U.S. C-Corp licenses the software

  • The U.S. entity uses or resells the foreign-developed product

  • License payments or royalties are deductible business expenses

  • Even though you can’t expense the offshore dev wages under §174, you still get a write-off

Step 3: Optimize the structure

  • Use arm’s-length transfer pricing

  • Ensure proper IP assignment and use agreements

  • Consider leveraging a cost-sharing agreement if future IP will be co-developed

💡 Example

Let’s say your startup:

  • Has a Delaware C-Corp as the main company

  • Employs 5 developers in Romania through a wholly owned subsidiary

  • Generates revenue in the U.S. from a SaaS platform built by that team

Under the OBBB:

  • You can’t expense Romanian dev wages under §174A

  • But if the Romanian entity licenses the software back to the U.S. C-Corp…

  • The U.S. company can deduct $300,000+ per year in license or royalty fees

You’ve effectively turned a non-deductible R&D cost into a deductible operating expense.

Key Legal + Tax Considerations

  • You must document your intercompany pricing and IP rights clearly

  • Be ready to produce transfer pricing documentation if audited

  • Local tax compliance (e.g. Romania, India) is still required

  • Consider treaty implications and potential withholding taxes on cross-border payments

If structured correctly, this setup is fully legal, tax-efficient, and increasingly common in global software development.

Who Should Consider This?

This strategy is ideal if you’re:

  • A startup or SaaS company with overseas dev teams

  • A U.S. C-Corp planning to license or commercialize products built abroad

  • Already using Upwork, Toptal, or offshore contractors and want to move to a structured entity

  • Working with VCs who expect clean IP rights and compliant tax positioning

Combine With Domestic R&D Expensing

Your U.S.-based engineers still qualify for §174 expensing — and may trigger R&D credits under §41.

The goal: Fully expense U.S. R&D, deduct foreign dev through royalties or licensing — and document everything to stay compliant.

Want Help Structuring It?

We help founders:

  • Build compliant offshore subs

  • Draft intercompany license agreements

  • Layer this with §174 expensing and QSBS eligibility

  • Optimize global tax positioning

This isn’t just a tax loophole — it’s a global growth strategy under the new tax law.