January 26, 2026
Re: Ruling Request: Corporate Income Tax
Dear *****:
This will respond to your letter in which you request an exemption for ***** (the “Taxpayer”) from the requirement to add back intercompany interest expense for the taxable year ended December 31, 2013.
FACTS
For the taxable year at issue, the Taxpayer, a wholly owned subsidiary of ***** (the “Parent”) paid interest pursuant to an intercompany loan agreement that was part of a centralized cash management system used by the Taxpayer and many other subsidiaries of the Parent. One of these subsidiaries, ***** (the “***”), held intangible property. According to the Taxpayer, royalty payments for the use of such intangible property were paid by other affiliates, including the Taxpayer, to the Parent.
The Taxpayer added the interest expense back to federal taxable income for purposes of computing its Virginia taxable income pursuant to Virginia Code § 58.1-402 B 9 a. The Taxpayer subsequently applied to the Department requesting relief from the add-back on the basis that the intercompany loans served a valid business purpose.
RULING
Intercompany Interest Expenses
Virginia Code § 58.1-402 B 9 a requires a taxpayer to add back intercompany interest expenses and costs. For this purpose, Virginia Code § 58.1-302 limits interest expenses and costs to those that are directly or indirectly related or connected to transactions involving intangible property. For example, an interest expense add-back is required when intercompany license fees generated by a corporation holding an intangible asset are used to make loans to related corporations.
The affiliated group’s centralized cash management system required subsidiaries to deposit their cash with the Parent. Depending on what intercompany payments were owed to the Parent, a subsidiary would then either be in a net payable or net receivable position. If it was in a net payable position, the Parent would advance an intercompany loan at a certain interest rate to cover the difference. In this case, the Taxpayer was in a net payable position for the taxable year at issue.
Because the Parent was receiving royalty income from the use of intangibles by other affiliates, at least some of that income could have been used to make intercompany loans. In addition, at least part of the loan being advanced could have been used to pay royalties still owed to the Parent. Without a more detailed accounting of the transactions at issue, the Department is unable to determine what part, if any, of the interest was not directly or indirectly connected to transactions involving intangible property, and thus not subject to the add-back.
Valid Business Purpose
The Taxpayer contends that it should be allowed to exclude the interest expense from the add-back requirement because the intercompany transactions had a valid business purpose other than the avoidance or reduction of tax.
In order to apply to the Commissioner for relief based upon the existence of a valid business purpose, a taxpayer must file its Virginia income tax return reporting the addition in accordance with the statute and remit all taxes, penalties, and interest due for the taxable year. A taxpayer may then petition the Commissioner to consider evidence relating to any transactions between it and related members that resulted in its taxable income being increased. The Commissioner may permit the taxpayer to file an amended return if the application demonstrates by clear and convincing evidence that the transactions resulting in such increase in taxable income had a valid business purpose other than the avoidance or reduction of the tax.
The Taxpayer’s request was made in accordance with the procedure for claiming the business purpose exception from the addition for intangible and interest expenses paid related entities pursuant to Virginia Code § 58.1-402 B 8 b. Accordingly, the question now before the Department is whether the Taxpayer has demonstrated by clear and convincing evidence that the intercompany transactions resulting in the addition to taxable income had a valid business purpose other than the avoidance or reduction of tax due.
The Taxpayer has demonstrated by clear and convincing evidence that its cash-management system had the valid business purpose of managing cash deposits centrally and minimizing costs among a very large number of subsidiaries. Specifically, the Taxpayer has presented evidence that, by consolidating its banking arrangements, it was able to enhance efficiency, decrease costs, and increase profitability. The Taxpayer also demonstrated that the corresponding items of interest income received by the affiliate were subject to tax in other states, and thus there does not appear to have been an intention to avoid tax.
Because the Taxpayer demonstrated that the intercompany loan transactions had a valid business purpose other than the avoidance or reduction of tax due, the Taxpayer may file an amended return excluding the addition of the interest expense paid pursuant to such transactions. Pursuant to Virginia Code § 58.1-402 B 8 b, the amended return must be filed within one year from the date of this ruling.
The Code of Virginia sections cited are available online at law.lis.virginia.gov. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****.
Sincerely,
Kristin L. Collins
Tax Commissioner
Commonwealth of Virginia
AR/595.X