The New York State Tax Department has issued important guidance regarding the scope of the exemption from Article 9-A for non-U.S. corporations that use limited liability companies to engage in qualifying investment activities in New York. Advisory Opinion, TSB-A-15(5)C (N.Y.S. Dep’t of Taxation & Fin., July 10, 2015).
The facts presented are straightforward. A Swiss holding company is the sole member of a Delaware limited liability company (“LLC”) that is treated as a disregarded entity for federal and state income tax purposes. The LLC is solely engaged in investing in securities in private equity funds, hedge funds and operating-companies for its own account. The LLC has an office in New Jersey, and has never owned or leased real property in New York. The Swiss holding company is not otherwise engaged in the conduct of a U.S. trade or business for federal income tax purposes, and thus does not have effectively connected income under IRC § 882.
Generally, under IRC § 864(b)(2), trading in securities or commodities by a non-dealer is not considered a trade or business within the United States for federal income tax purposes. Therefore, a foreign corporation engaged in those activities in the United States does not have effectively connected income.
The question presented was whether the Swiss holding company will become subject to Article 9-A if the LLC were to relocate its office from New Jersey to New York City. The Department ruled that so long as the LLC continues to engage solely in qualifying activities in New York within the meaning of IRC § 864(b)(2), and the Swiss holding company continues not to have effectively connected income, the holding company will not be subject to Article 9-A. This is based on the language of Tax Law § 209(2-a), which provides that an alien (i.e., non U.S.) corporation that is not treated as a “domestic corporation” for federal purposes and that has no effectively connected income is not subject to Article 9-A. Under corporate tax reform, alien corporations no longer have an annual franchise tax filing requirement.
In response to the question regarding what may be required to substantiate entitlement to the exemption, the Department would say only that it may be necessary to produce the alien corporation’s books and records to confirm, for example, that the corporation’s New York activities are limited to the investment or trading activities described in IRC § 864(b)(2).
The Advisory Opinion specifies that it applies only to situations where the LLC’s in-State activities are limited solely to investment activities prescribed under IRC § 864(b)(2). It does not address the consequences if the Swiss holding company has effectively connected income from some other activity conducted wholly outside the State. It also does not discuss the result if the holding company has other affiliates that do have effectively connected income in the United States. It should be noted that alien corporations that are not treated as “domestic corporations” and that do not have effectively connected income cannot be included in a New York combined return.
The Department provided this guidance as an Advisory Opinion, even though it has informally indicated that it would generally address interpretations under corporate tax reform through regulations and Corporate Tax Reform FAQs posted on its website, rather than through Advisory Opinions.