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The New York State Department of Taxation and Finance (Department) recently updated its frequently asked questions related to New York's corporate tax reform,¹ addressing combined filing requirements and nexus issues related to alien corporations² and foreign corporations.³ The Department addressed the following issues, among others: when non-taxpayer members of a unitary group that meet certain ownership requirements must be included in a combined report; when alien corporations that generate income, gain, or loss that is effectively connected with the conduct of its US trade or business (ECI) must be included in a combined report; and when an alien corporation's treaty-exempt income is subject to New York's Business Corporation Franchise tax.

Combined reporting and alien corporations

The Department was asked whether a non-taxpayer member of a unitary group that meets the ownership requirements under N.Y. Tax Law Section 210-C must be included in a combined report, to which it responded yes, except for certain corporations. Those corporations excluded from the combined report include, among other entities, an alien corporation that is not treated as a "domestic corporation" under federal income tax law and either has no ECI for the tax year under New York tax law or has treaty-exempt income, and in the absence of such exemption, would have no ECI for the tax year under New York tax law.⁴

The Department further instructed that an alien corporation that has ECI must be included in a combined report with a taxpayer if the alien corporation meets the combined reporting requirements in N.Y. Tax Law Section 210-C, regardless of whether the alien corporation is a New York taxpayer. An alien corporation that does not have ECI and is not treated as a "domestic corporation" under federal income tax law is not includable in a combined report, even if it would otherwise be subject to tax under New York's nexus provisions according to the Department's guidance. The Department's guidance provides several explanatory examples.

Nexus and alien corporations

The Department's guidance further states that an alien corporation with NY ECI is a taxpayer under the Business Corporation Franchise Tax and is subject to New York's combined reporting requirements. Additionally, an alien corporation that is not treated as a "domestic corporation" under federal income tax law that has treaty-exempt income is taxable under the Business Corporation Franchise Tax if the income would be treated (in the absence of the exemption) as ECI and the corporation is subject to tax under New York's nexus provisions. The full amount of the alien corporation's treaty-exempt income must be added back to its entire net income.

The Department reiterated that ECI encompasses loss as well as income and gain. A corporation that has ECI and is subject to tax under New York's nexus provisions is considered a taxpayer under the Business Corporation Franchise Tax. If such a corporation conducts its trade or business in New York, it is subject to New York tax. Such corporations that conduct trade or business elsewhere in the US but are engaged in one or more of the nexus creating activities listed in N.Y. Tax Law Section 209(1)(a) are also subject to New York tax. An alien corporation that does not have ECI and is not treated as a "domestic corporation" under federal income tax law will not be considered a taxpayer under the Business Corporation Franchise Tax, even if the corporation would otherwise be subject to tax under New York's nexus provisions. Several explanatory examples for these concepts are included in the Department's guidance.

Nexus and foreign corporations

A foreign corporation with $1 million or more in receipts from New York State activities related to the sale of tangible personal property is not required to file an Article 9-A tax return if all of its activities in the state are activities described in P.L. 86-272 and in 20 NYCRR 1-3.4(b)(9). However, a foreign corporation that is exempt from tax because of P.L. 86-272 may choose to file a Form CT-3 (General Business Corporation Franchise Tax Return). If the foreign corporation files this form, it must mark the box on line C of page 1 disclaiming tax liability in New York State based on P.L. 86-272, complete the form in its entirety, and enter $0 on Part 2, line 4 (tax due after credits). A foreign corporation with $1 million or more in receipts from New York State activities is subject to tax and must file an Article 9-A tax return if any of its New York receipts are derived from activities not described in P.L. 86-272, such as the sale of digital products.

Implications

In light of these clarifications, all alien corporations should review their ECI/treaty protection positions for potential New York State and City tax implications for separate company and combined unitary reporting purposes.

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Contact Information For additional information concerning this Alert, please contact:   State and Local Taxation Group General/non-financial institutions • David Schmutter (212) 773-3455 • Sam Cohen (212) 773-1165 Financial institutions • Karen Ryan (212) 773-4005 • Jeffrey Serether (212) 773-9360 • Matthew Musano (212) 773-2749

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ENDNOTES

¹ In 2014 and 2015, the New York legislature significantly amended Article 9-A of its general corporations tax law. For more information on the New York State (NYS) corporate franchise tax provisions contained in Article 9-A, see Tax Alert 2016-0714.

² Under New York's tax law, an "alien corporation" is defined as a corporation that is organized outside of the US while a "foreign corporation" is defined as a corporation that is organized outside of New York State (and includes corporations organized under the laws of other US states).

³ New York City should follow this guidance with regard to the sections discussing combined reporting and nexus for alien corporations, but not with regard to nexus for foreign corporations, as New York City does not have the economic nexus provisions that are included in New York State's tax law.

⁴ Other entities excluded from the combined report are: (1) a corporation that is (or, if subject to tax, would be) taxable under Articles 9 or 33; (2) a real estate investment trust (REIT) that is not a captive REIT (other than a qualified REIT subsidiary); (3) a regulated investment company (RIC) that is not a captive RIC; (4) a New York S corporation; and (5) a corporation subject to tax solely because it is a limited partner of a limited partnership with receipts or activities in New York, and none of the corporation's related corporations are subject to tax under Article 9-A.