Tax Type
Corporation Income Tax
Description
Parent/subsidiary transactions; Tradename royalty; Loans
Topic
Computation of Income
Date Issued
06-28-1995
June 28, 1995
Re: Ruling Request; Corporate Income taxes
Dear***************
This will reply to your letter of January 24, 1995, in which you request a ruling from the department with respect to the application of Code of Virginia §58.1-446 to certain transactions on behalf of an unidentified client. Your questions are addressed separately below.
How will the department treat transactions involving loans between a parent corporation and its 100% owned Delaware subsidiary. The subsidiary's operations are managed through an arrangement with a Delaware-based trust company.
VR 630-3-446 §2 A 3 c provides, in pertinent part:
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- Factors creating a rebuttable presumption that income from business done in Virginia is distorted include, but are not limited to:
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- c. Whether there are significant intragroup lending transactions other than those described in §2 C 3, especially where the lending party has no other significant activity, and the source of funds is either (i) dividends or capital contributions by other members of the group, if a substantial portion of the funds received is loaned to any member of the group within 24 months of the dividend or contribution and the loan provides working capital to the borrower; or (ii) borrowed funds guaranteed by, or secured by the property of, a group member other than the lending party;...
- c. Whether there are significant intragroup lending transactions other than those described in §2 C 3, especially where the lending party has no other significant activity, and the source of funds is either (i) dividends or capital contributions by other members of the group, if a substantial portion of the funds received is loaned to any member of the group within 24 months of the dividend or contribution and the loan provides working capital to the borrower; or (ii) borrowed funds guaranteed by, or secured by the property of, a group member other than the lending party;...
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- Factors creating a rebuttable presumption that income from business done in Virginia is distorted include, but are not limited to:
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- Lending transactions. In an intragroup lending transaction, the lending party must be a discrete, separate business enterprise with its own employees, office space, and books and records. Funds must be loaned at a fair market value interest rate, with collateral, payments, and credit standing substantially similar to those which the borrower could obtain from an unrelated lending institution.
- Lending transactions. In an intragroup lending transaction, the lending party must be a discrete, separate business enterprise with its own employees, office space, and books and records. Funds must be loaned at a fair market value interest rate, with collateral, payments, and credit standing substantially similar to those which the borrower could obtain from an unrelated lending institution.
A second tier,100% owned Delaware subsidiary owns and manages intangibles, specifically tradenames, and receives a royalty based on the Parent corporation's sales. The Delaware subsidiary would be domiciled in the same state as the Parent, and its board of directors would include employees of the Parent.
As you will see from the attached public documents (P.D. 95-143 (6/5/95); 95-86 (4/26/95); and 94-179 (6/8/94)), depending on the facts and circumstances the department may disallow the royalty, adjust the royalty amount, or consolidate the corporations for purposes of determining Virginia taxable income. As you will also see from P.D. 94-309 (10/11/94), the department will also respect intercorporate transactions involving intangibles where sufficient business activity is found to exist.
The transaction which you describe will be highly dependent on the actual nature of the tradename involved. The department finds that the valuation of royalties with respect to tradenames is highly subjective. In the absence of extensive third-party licensing activity, the department often finds it difficult to agree with taxpayers as to the proper royalty amount. Accordingly, the department cannot offer a conclusive determination based on the facts you have presented; however, we suggest that you review fact patterns in the enclosed public documents for further guidance.
If you have additional questions regarding this transaction, please call*********in the Office of Tax Policy at*****************.
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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Rulings of the Tax Commissioner