On February 2, 2026, the Minnesota Department of Revenue (Department) issued Revenue Notice No. 26-01¹ (Notice), which outlines the Department's position on when a foreign corporation has taxable income in Minnesota. The Department explained that Minnesota's use of constitutional nexus to determine that state's jurisdiction to tax foreign corporations differs from the Internal Revenue Code (IRC) test used to establish when a foreign corporation is subject to tax² and can result in a different calculation of taxable income. The Notice discusses two common examples of when this occurs.

The "not effectively connected" example

In this example, the foreign corporation does not have effectively connected income (ECI) to report on federal Form 1120-F. The corporation also does not have any physical presence in the United States (e.g., an office or other fixed place of business) but makes sales in Minnesota producing income for purposes of IRC Sections 61 and 63. In this situation, the Notice requires the corporation to enter its federal taxable income, as defined in IRC Section 63, on line 1a of Minnesota Form M4I, Income Calculation, without consideration of whether it has ECI. The Department's position is that the corporation must also complete and attach Schedule REC, Reconciliation, to explain the difference between line 1a on Minnesota Form M4I, Income Calculation, and the line on Form 1120-F showing its federal taxable income before net-operating loss and special deductions.

The "foreign treaty" example

In this example, the foreign corporation is exempt from paying federal income tax because of a tax treaty signed by the United States. While the treaty exempts a corporation from federal income taxes imposed by the IRC, the Department's position is that subnational (e.g., state) taxes are not included in the exemption, meaning Minnesota may tax the federal taxable income. As a result, the foreign corporation must prepare a pro forma federal Form 1120 to calculate Minnesota taxable income.

Implications

The Notice is not based on any law change but outlines the Department's position in this area. It includes more expansive explanations than guidance that has been posted on the Department's website for the last several years.