N.Y. Addresses Status of Alien Corps in New Tax Rules

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By John Herzfeld

An alien corporation’s income is subject to the New York business corporation franchise tax where the terms of a tax treaty permit state taxation, even when all of the income is exempt from federal taxable income, the state Department of Taxation and Finance said.

The guidance was among a new group of answers to frequently asked questions posted by the department Oct. 2 as part of its outreach regarding the broad overhaul of the state’s business taxes. The FAQs address issues raised by taxpayers and practitioners as part of an informal rulemaking preceding the proposal of new formal regulations.

An alien, or non-U.S., corporation that isn’t treated as a “domestic corporation” under I.R.C. Section 7701 and has treaty-exempt income is taxable under the state business tax if:

  •  such income would be treated, in the absence of the exemption, as effectively connected with its U.S. trade or business; and
  •  the corporation is subject to tax under New York’s nexus rules.

In such a circumstance, the department advised, the full amount of the alien corporation’s treaty-exempt income must be added back to the corporation’s entire net income.

The guidance also said an alien corporation that generated income, gain, or loss that is effectively connected with the conduct of its U.S. trade or business must be included in combined reports with a taxpayer “regardless of whether or not it is itself a New York taxpayer,” if the alien is subject to combined reporting requirements under state tax law.

However, an alien corporation that has no income, gain, or loss that is effectively connected with its U.S. trade or business and is also not treated as a “domestic corporation” under Section 7701 isn’t includable in a combined report. Such a corporation isn’t includable in a combined report even if it would otherwise be subject to tax under New York’s nexus rules, the state said.

More on Combined Reporting

The new entries also include guidance finding that certain non-taxpayer members of a unitary group must be included in combined reports. Exceptions include certain real estate investment trusts, certain regulated investment companies, New York S corporations, and certain alien corporations.

The FAQs feature on the department’s website is one of several guidance tools offered by the state as it pursues an unprecedented effort to carry out broad changes made to the state corporate franchise tax in 2014 and 2015.

The changes are aimed at modernizing and streamlining the tax code. New York officials have billed the effort “the most significant reform” of the state’s corporate tax system since the 1940s.

To contact the reporter on this story: John Herzfeld in New York at jherzfeld@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

For More Information

The FAQs feature is at http://src.bna.com/s3J. The latest entries are marked "NEW" in yellow.

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