• Comments on Virginia's Proposed Intangible Holding Company Tax Regulation
  • January 9, 2009 | Author: N. Pendleton Rogers
  • Law Firms: LeClairRyan - Virginia Beach Office ; LeClairRyan - Richmond Office ; LeClairRyan - Washington Office
  • As the global credit crisis reverberates through corporate treasury departments, a number of companies are experiencing liquidity issues as access to commercial paper markets is frozen or restricted. More companies are being forced to tap emergency credit lines. In response, the Internal Revenue Service has eased requirements to allow corporate taxpayers to access short-term loans from their "controlled foreign corporations" without suffering adverse United States income tax consequences. IRS Notice 2008-91 (issued Oct. 3, 2008).

    Unfortunately, federal and state tax policies do not always run in tandem. For instance, Virginia and 17 additional states, including Connecticut, Massachusetts, Michigan, New Jersey, and New York, preclude corporate taxpayers from deducting royalty and interest expenses paid to "related parties" unless various narrow exceptions are met.  These "add-back statutes" are aimed at curtailing a common state corporate income tax planning strategy that became prevalent in the 1990s the deduction of royalty and interest expense payments to related intangible (or passive investment) holding companies based in Delaware, Nevada, and other states that either do not impose corporate income taxes or that may provide other tax-favored treatment.

    The Virginia Department of Taxation issued an "Exposure Draft" of its Intangible Holding Company Regulation (23 VAC 10-120-103) in an attempt to interpret various features of Virginias "add-back statute." However, one of the Departments proposed interpretations could result in adverse Virginia income tax consequences for companies accessing short-term loans from their CFCs. Thus, the Department's Exposure Draft could present an impediment for Virginia corporate taxpayers when accessing such financing sources.

    As a result, LeClairRyan provided comments to the Department regarding the Exposure Draft and its potential impact on the short-term loans permitted by Notice 2008-91. We commented that, to avoid a conflict with one aspect of the federal governments financial rescue plans, the Department should interpret the Virginia "add-back" statute as inapplicable to legitimate intercompany lending arrangements, including those described in Notice 2008-91.

    A copy of our comments is available at the link here - /files/Uploads/Documents/IHCO Exposure Draft Comments (LeClairRyan_11_25_08).pdf

    Since 17 additional states have an "add-back" statute that may be wholly or partially similar to Virginias, similar potential adverse state income tax consequences could be presented for U.S. companies seeking the financing described in Notice 2008-91. A company taking advantage of Notice 2008-91 should also consider the state income tax consequences for the short-term loans.