United States

New York DOT issues advisory opinion regarding franchise tax

LLC’s in-state presence will not subject alien corporation to franchise tax

TAX ALERT  | 

Deputy Counsel Deborah R. Liebman of the New York State Department of Taxation and Finance (department) issued an advisory opinion at the request of a Swiss holding company as to whether or not it is subject to the New York franchise tax pursuant to Article 9-A of the Tax Law. The holding company is the sole member of a Delaware limited liability company (LLC) that is treated as a disregarded entity for federal and state tax purposes. The LLC is a New Jersey-based investment company that invests in securities in various private equity funds, hedge funds and operating companies for its own account. Specifically, the holding company asked the department if it would be subject to the franchise tax if the LLC relocates its business offices from New Jersey to New York City. Furthermore, should the company not be subject to the franchise tax, the holding company asked for an opinion as to what documentation would be required by the department for purposes of substantiating their position.

Under New York Tax Law section 209 (2-a), an alien corporation is not deemed to be doing business, employing capital, owning or leasing property, maintaining an office, or deriving receipts from activity in New York if its activities in the state are limited solely to investing or trading in stocks and securities or commodities, or any combination thereof for its own account. This definition falls within the meaning of section 864(b)(2). Section 209 (2-a) also provides that an alien corporation that is not treated as a domestic corporation and has no effectively connected income in a tax year will not be taxable for that year. Additionally, under section 208 (9)(iv) an alien corporation's net income is equal to the taxable income that effectively-connected with the conduct of a trade or business in the United States.

The advisory opinion determined that since the LLC's activities fell within the scope of section 864(b)(2), the holding company, as sole member of the LLC, would not be deemed to be doing business in the state. This resulted in the department concluding that the alien holding company would have no effectively-connected income with the conduct of a trade or business in the United States and therefore would not be subject to New York's franchise tax.

The department then addressed the holding company's inquiry regarding the documentation required to substantiate such a position. The opinion concluded that with the repeal of the annual filing requirement for alien corporations under the prior tax law, a corporation may be required to produce any documentation deemed necessary and "without qualification" by the department for examination to permit the state to determine whether its activities continue to fall within the definition of section 864(b)(2).

While the advisory opinion is only binding on the department with respect to the entity requesting the opinion and is fact-specific, it is based on the law, regulations and department policies currently in effect. With both the New York state and New York City undergoing recent corporate tax reforms, it will be of significant importance to monitor the new tax law and the interpretations provided by the department. In this instance, the repeal of the filing requirement only places increased emphasis on the importance of maintaining detailed books and records required to substantiate an alien corporation's position that it is not subject to New York's franchise tax.

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