Tax Type
Corporation Income Tax
Description
Foreign source income; Engineering services
Topic
Computation of Income
Subtractions and Exclusions
Date Issued
08-30-1990
August 30, 1990
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-302 Definitions; Foreign Source Income
Dear********************
This is in response to your letters of July 29, 1989 and March 23, 1990, in which you applied for correction of an assessment of corporation income tax.
Facts
The taxpayer is a personal service Delaware corporation headquartered in Virginia. The taxpayer had a wholly owned subsidiary (the Sub), organized under the laws of New York with branch offices overseas. The Sub entered into a Saudi Arabian partnership in order to do business in that country. Saudi law did not allow the Sub to operate through a wholly owned Saudi corporation, as the law prohibited 100% foreign ownership of such an entity. The partnership was composed of two partners, the Sub and a Saudi consulting firm, each with a 50% interest.
On its Virginia consolidated corporation income tax returns the taxpayer claimed a subtraction for foreign source income for the income earned by the partnership. The income represents fees received by the partnership for engineering services performed outside the United States. The subtraction was disallowed upon audit. You contend that the income was properly subtracted under the definition of foreign source income provided under Va. Code §58.1-302.
Discussion
The Virginia subtraction for foreign source income is limited to the specific types of income from without the United States set forth in Va. Code §58.1-302. The department has previously ruled that "the words 'technical fees from . . . services performed' cannot be taken out of their context to create a subtraction for income earned from the performance outside the United States of any service which can be characterized as of a technical nature. The words are incorporated in a subsection dealing with passive income from the rental of real estate and with income from patents, copyrights and other intangible property." P.D. 86-209, November 3, 1986 (copy enclosed).
In your letter of July 29, 1989, you state that the income in question was "earned by [the Sub] and its partnership with the Saudi engineering firm from civil and other engineering projects in Saudi Arabia." The income is compensation for engineering and other services provided.
Under the provisions of Va. Code §58.1-391(B) and I.R.C. §702(b), the character of the income for the partner is the same as it is to the partnership. Because the income in question is compensation for engineering services, it is not one of the types of income which qualifies as foreign source income. Consequently, the income is not eligible for the foreign source income subtraction.
The foreign source income subtraction claimed on the 6/30/83 and 6/30/84 returns is disallowed. It is not necessary to address the other issues you raise in your letter, since they are based on the premise that the income in question qualifies as "technical fees" under the definition of foreign source income.
Determination
Accordingly, the assessment is correct as made and the taxpayer is not due a refund for the taxes paid for the fiscal years ending June 30, 1983 and June 30, 1984.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner