Tax Type
Corporation Income Tax
Description
Dividends and royalties from domestic and foreign subsidiaries
Topic
Computation of Income
Royalties
Date Issued
08-22-1986
August 22, 1986
Re: Request For Ruling; Corporation Income Tax
Taxation of Dividends and Foreign source income
Dear**********************:
This is in response to your letter of July 11, 1986, in which you request a ruling on the tax consequences or organizing a holding company under Virginia law. The holding company and one or its subsidiaries will be headquartered in Virginia and doing business in Virginia. There will also be foreign subsidiaries. The only income the holding company will receive will be dividends and royalties from licensing intangible property to its domestic and foreign subsidiaries.
The dividends from the domestic subsidiary would not be taxable to the holding company to the extent that the dividends are excluded from federal taxable income under §243 or the Internal Revenue Code (I.R.C.).
The dividends from the foreign affiliates, if included in federal taxable income, would be subtracted from Virginia Taxable Income to the extent that they would be considered "income from without the U.S." under §§861-863 I.R.C. It should be noted that this subtraction is allowed only to the extent that the income is included in federal taxable income. Therefore the gross dividends must be reduced by any expenses deducted in arriving at federal taxable income which are attributable to the dividends under §§861-863.
Any royalties received from its foreign affiliates for the licensing of patents and other intangible property would also qualify for the Virginia foreign source income subtraction in the same manner as foreign dividends.
Royalties and other income (except dividends) received from its domestic subsidiary would be fully taxable. However, since both the holding company and its domestic subsidiary would be taxable in Virginia, they may elect to file a consolidated Virginia return in the first year that both are required to file a Virginia return. Under the rules set forth in the Treasury Regulation §1.1502 the income received from its domestic subsidiary would be eliminated.
You have also asked about the corporate franchise tax and registration fee administered by the State Corporation Commission. You are correct in stating that the franchise tax on domestic corporations was eliminated by Chapter 1 of the 1986 Acts of Assembly and that the annual registration fee for domestic and foreign corporations is now a minimum or $50 and a maximum of $850 depending on the number or shares authorized. Under §58.1-2801 the charter fee for organizing a domestic corporation varies from $25 to $l,200 depending on the number of shares authorized. Although I am not aware or any other franchise type taxes that might apply, I suggest that you request the State Corporation Commission to verify this.
Assuming that the holding company is passive and has no employees subject to withholding and payroll taxes, owns no real or personal property subject to local taxation and makes no purchases or sales subject to sales and use taxes, then the above constitute the only tax liabilities of the holding company if it is organized and headquartered in Virginia.
If I can be or any further assistance please do not hesitate to let me know.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner