Tax Type
Corporation Income Tax
Description
Passive Foreign Investment Company (PFIC)
Topic
Computation of Income
Date Issued
03-05-1993
March 5, 1993
Re: Va. Code § 58.1-1821 Application; Corporation Income Tax
Dear**********
This will reply to your letter dated February 18, 1992, protesting certain adjustments pursuant to the audit of ***** (the "Taxpayer").
FACTS
Numerous adjustments were made pursuant to a recent audit of the taxpayer; however, you are protesting only one adjustment: the disallowance of a Virginia subtraction for the income of a Passive Foreign Investment Company (PFIC) that is a qualified electing fund (QEF) pursuant to Internal Revenue Code (IRC) § 1293. You assert that this income should be treated as foreign source dividend income under Virginia Code §§ 58.1-402.C.8 and 10, and therefore, subtracted in determining Virginia income tax. In support of this argument, you cite the I.R.S. treatment of the income at issue as "subpart F income under IRC section 951(a) (IRC Section 1293(f))."
DETERMINATION
Two categories of foreign source income pertinent to this discussion are permitted to be subtracted pursuant to Virginia law: foreign source income as defined in Va. Code § 58.1-302, and Subpart F income.
Foreign Source Income: The following types of income are specifically allowed as a deduction from federal taxable income in determining Virginia taxable income: interest, dividends, rents, royalties, license and technical fees; and gains, profits and other income from selling intangible or real property.
Subpart F Income: Income included in federal taxable income pursuant to I.R.C. § 951, less attributable expenses, is subtracted in determining Virginia taxable income. See Virginia Regulation (VR) 630-3-402.C.7.
"Subpart F income" is income derived from a controlled foreign corporation (CFC), and includes, in pertinent part, foreign base personal holding company income, generally consisting of dividends, interest, rents, royalties, and foreign currency gain. See I.R.C. § 954(c).
Qualified Electing Fund Income: A corporation which owns a Passive Foreign Investment Company (PFIC) electing to be treated as a "qualified electing fund" (QEF) under I.R.C. § 1295 is generally required to include in income a pro rata share of the PFIC's earning and profits, attributed on a daily basis with respect to the shareholder's PFIC stock. See I.R.C. § 1293(a)(1). Further, the I.R.S. requires the QEF income to be treated as if it were included in taxable income under I.R.C. § 951(a) (subpart F income). See I.R.C. § 1293(f).
Conclusion: If the taxpayer's foreign subsidiary had not elected to be treated as a QEF, its dividends would qualify for a Virginia subtraction as either dividends from a corporation, or as foreign source income. Also, the I.R.S. mandates subpart F income treatment for the QEF income at issue, for foreign tax credit computation purposes. Therefore, the taxpayer is permitted to subtract QEF income from federal taxable income in determining Virginia taxable income.
Accordingly, the audit report will be revised to reflect the finding in this letter, and a refund will be issued.
Please call the Department if you have additional questions regarding this issue.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/6001G
Rulings of the Tax Commissioner