Tax Type
Corporation Income Tax
Description
Modifications to federal taxable income; Royalties from controlled foreign corporations
Topic
Collection of Tax
Royalties
Date Issued
03-07-1994
March 7, 1994
Re: §58.1-1821 Application: Corporate income taxes
Dear*************
This will reply to your letter of September 27, 1993 in which you applied for correction of assessments for additional corporate income taxes to ******** (the "Taxpayer") for the taxable years 1988, 1989 and 1990.
FACTS
The Taxpayer was field audited for the years 1988, 1989 and 1990, and numerous adjustments were made. The Taxpayer is contesting the adjustment made with respect to royalties received from certain controlled foreign corporations ("CFC"s).
DETERMINATION
The Taxpayer received royalties from CFC's pursuant to standard agreements which govern the legal rights and responsibilities of the CFC to use valuable intangible assets of the Taxpayer. The assets include the taxpayer's name, trademarks, patents, know-how and other technology. The taxpayer receives the royalties based on a percentage of the CFC's sales, and provides only limited services in order to assist the CFC in using the intangible assets. Any services which are performed by the Taxpayer are ancillary to the licensed intangible and de minimis in nature. The Taxpayer does not separately charge for any support services relative to the licensing of its intangible property. The Taxpayer recognizes the payments as royalty income for both tax and accounting (GAAP) purposes.
Pursuant to Va. Code §58.1-302, foreign source income includes:
-
- "Rents, royalties, license, and technical fees from property located or services performed without the United States or from any interest in such property, including rents, royalties, or fees for the use of or the privilege of using without the United States any patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like properties...
The department has previously ruled that royalties received from foreign affiliates for the licensing of patents and other intangible property qualify for the Virginia foreign source income subtraction. See Public Document 86-166 (8/22/86), copy attached.
The royalty income in question constitutes foreign source income in accordance with Va. Code §58.1-302. The audit report will be revised, the royalties in question will be allowed as foreign source income, and the amount of the foreign source income subtraction, which is determined net of related expenses, will be redetermined.
Accordingly, the assessment will be returned to the Interstate Audit Unit for correction. You will shortly receive a revised audit report and bill reflecting these revisions and the recomputation of interest accrued to date. The bill must be paid in full to avoid additional interest and collection actions.
Sincerely,
Danny M. Payne
Acting Tax Commissioner
OTP/7424M
Rulings of the Tax Commissioner