Technical Information Release  TIR 98-6: Massachusetts Corporate Excise Treatment of Offshore Investment Companies

Date:	06/24/1998
Organization:	Massachusetts Department of Revenue
Referenced Sources:	Massachusetts General Laws

Corporate Excise

A. Purpose

The Taxpayer Relief Act of 1997 (the Act) has expanded the scope of activities that offshore investment companies may conduct in the United States without subjecting themselves to the federal income tax. See Sec. 1162(a) of the Act, amending I.R.C. § 864(b)(2)(A)(ii). This TIR explains the application of the Massachusetts corporate excise to offshore investment companies that conduct activities in the Commonwealth. (1) Specifically, this TIR provides safe harbor rules under which certain offshore investment companies will not be subject to the Massachusetts corporate excise.

B. Federal Law

In general, a corporation organized under the laws of a foreign country (an offshore company) is subject to the federal income tax on all of its income that is effectively connected with a trade or business in the United States. For tax years beginning before January 1, 1998, an offshore company engaged in trading stocks or securities for its own account (an offshore investment company) was not treated as engaged in a trade or business in the United States, unless its principal office was in the United States. See I.R.C. § 864(b)(2)(A)(ii), before its amendment by Sec. 1162(a) of the Act. The Internal Revenue Code did not provide a definition of the term "principal office." However, Treas. Reg. § 1.864-2(c)(2)(iii) provided a safe harbor rule, pursuant to which an offshore investment company was not considered to have its principal office in the United States if it carried on all or a substantial portion of the following administrative functions from an office located outside the United States:

1. communicating with its shareholders,
2. communicating with the general public,
3. soliciting sales of its own stock,
4. accepting subscriptions of new shareholders,
5. maintaining its principal corporate records and books of account,
6. auditing its books of account,
7. disbursing payments of dividends, legal and accounting fees, and officers' and directors' salaries,
8. publishing or furnishing the offering and redemption price of its issued shares,
9. conducting shareholders and board of directors meetings, and
10. making redemptions of its own stock.

These requirements became known as the "Ten Commandments." An offshore investment company that complied with these requirements was generally not subject to federal income taxation on its own account. (2)

Effective for taxable years beginning after December 31, 1997, the Act amended I.R.C. § 864(b)(2)(A)(ii) to eliminate the reference to a principal office in the United States. Thus, an offshore investment company may now maintain a principal office in the United States without being deemed to be engaged in a trade or business in the United States for federal tax purposes. As a result, an offshore investment company may now conduct the aforementioned administrative functions in the United States without subjecting itself to the federal income tax.

C. Massachusetts Law

Under G.L. c. 63, § 39, an excise is imposed on every foreign corporation that exercises its charter, is qualified to do business or actually does business in Massachusetts, or owns or uses any part or all of its capital, plant or other taxable property in the state. Massachusetts regulation 830 CMR 63.39.1 describes the circumstances under which a foreign corporation is subject to the tax imposed by G.L. c. 63, § 39. Under Section (4)(b) of the regulation, the term doing business includes the following:

• the buying, selling or procuring of services or property;
• the execution of contracts;
• the exercise or enforcement of contract rights;
• the maintenance of a place of business;
• the employment of labor; and
• each and every other act, power, right, privilege or immunity exercised or enjoyed in Massachusetts as an incident to or by virtue of the powers and privileges acquired through corporate form.

If a foreign corporation's employees, agents or representatives engage in the above activities, the activities will be imputed to the corporation and thus subject the corporation to corporate taxation in Massachusetts. However, if activities are performed by independent contractors on behalf of the corporation, the activities will not be imputed to the corporation. A person is an independent contractor only if the criteria in 830 CMR 63.39.1(7) are met. (3)

D. Effect of Federal Law Change on Massachusetts Law

If an offshore investment company, as described above, conducts activities in Massachusetts, it may be considered to be doing business in the Commonwealth and therefore subject to the Massachusetts corporate excise. The excise under G.L. c. 63, § 39 is imposed on a foreign corporation's tangible property or net worth and on its net income. A minimum excise of $456 is also imposed. A foreign corporation's net income for Massachusetts purposes is based on its federal gross income. G.L. c. 63, § 30.4. An offshore investment company that is not subject to federal taxation on its own account has no federal gross income. Thus, such an offshore investment company would not be subject to the net income measure of the excise. (4) However, an offshore investment company would be subject to tax under the net worth measure of the excise or the minimum excise if it is doing business in the Commonwealth.

Under Massachusetts law, an offshore investment company is not considered to be doing business in the Commonwealth if (i) its activities here are limited to the following activities and (ii) those activities are conducted through an independent contractor: (5)

• communicating with its shareholders,
• communicating with the general public,
• soliciting sales of its own stock,
• accepting subscriptions of new shareholders,
• auditing its books of account,
• disbursing payments of dividends, legal and accounting fees, and officers' and directors' salaries,
• publishing or furnishing the offering and redemption price of its issued shares,
• making redemptions of its own stock, and
• executing contracts related to the purchase, sale or management of securities.

 

Other activities conducted in Massachusetts may constitute doing business in the Commonwealth. Specifically, without limitation, the following activities conducted in Massachusetts by an offshore investment company may expose the offshore investment company to Massachusetts tax jurisdiction:
 

• maintaining its principal corporate records and books of account, (6)
• conducting shareholder and board of director meetings,
• maintaining a place of business, or
• executing contracts.

If an offshore investment company is subject to Massachusetts tax jurisdiction, the offshore investment company may apply for security corporation classification. Under G.L. c. 63, § 38B, a foreign corporation that "is engaged exclusively in buying, selling, dealing in or holding securities on its behalf and not as a broker" is eligible to be treated as a security corporation. See also Letter Rulings 91-2, 91-10. A security corporation is subject to the higher of (i) a 1.32% excise on its gross income as defined in the Internal Revenue Code or (ii) a minimum excise of $456. Id. An offshore investment company that is not subject to federal taxation on its own account has no federal gross income. (7) Thus, it would be subject only to the minimum excise imposed under G.L. c. 63, § 38B.

The Commissioner will treat an offshore investment company trading stocks or securities for its own account under I.R.C. § 864(b)(2)(A)(ii) as a security corporation if it is engaged exclusively in buying, selling, holding or dealing in securities as defined in the Securities Act of 1933, as from time to time amended, or the Investment Company Act of 1940, as from time to time amended. (8) The ownership of assets that are necessary in the conduct of an investment business will not preclude an offshore investment company from obtaining classification as a security corporation. See LR 86-1 and LR 93-15.

An application for security corporation classification must be received by the Commissioner before the end of the taxable year for which the corporation is seeking classification. See DOR Directive 86-33.
Very truly yours,

Frederick Laskey
Senior Deputy Commissioner

TIR 98-6

June 24, 1998

1. This TIR applies to offshore investment companies that are foreign corporations within the meaning of G.L. c. 63, § 30.2. (return to text)

2. For federal purposes, such offshore investment company may incur withholding tax liabilities on any income derived from sources within the United States. I.R.C. § 1442. However, as long as those withholding tax liabilities are met, this income is not required to be reported to the Internal Revenue Service by the offshore investment company on the offshore investment company's own return, and is not included in the offshore investment company's gross or taxable income. See I.R.C. § 882(a). (return to text)

3. One of these criteria require that an independent contractor regularly act on behalf of at least one bona fide principal apart from the foreign corporation. Partners, corporate affiliates, or other closely related parties are not considered to be separate principals. 830 CMR 63.39.1(7)(d). A service provider providing administrative and/or other services on behalf of an offshore investment company appears to satisfy this independent contractor criterion. The Department of Revenue will not consider a service provider to be a corporate affiliate or other closely related party to an offshore investment company to which it provides services merely because the service provider invests seed money in the offshore investment company. (return to text)

4. As stated in footnote two, an offshore investment company's income derived from sources within the United States is generally not required to be reported to the Internal Revenue Service on the offshore investment company's own account. The Department of Revenue takes the position that if such income is not required to be reported by the offshore investment company to the Internal Revenue Service for purposes of determining the offshore investment company's own federal income tax liability, such income is not gross income for purposes of determining the offshore investment company's net income measure of the excise under G.L. c. 63, § 39. However, to the extent that an offshore investment company is required to report income derived from sources within the United States to the Internal Revenue Service on its own return, such income is considered gross income for purposes of determining the offshore investment company's net income measure of the excise under G.L. c. 63, § 39. (return to text)

5. As used in 830 CMR 63.39.1(7)(e), the term financial institution includes all entities providing financial services, and is not limited to a financial institution as defined in G.L. c. 63, § 1. (return to text)

6. As long as the principal books and records of the offshore investment company are kept outside of Massachusetts, copies of books and records utilized by service providers may be located in Massachusetts without creating nexus for the offshore investment company. (return to text)

7. See footnotes two and four, above. (return to text)

8. This rule is intended as a safe harbor and makes no statement regarding the security corporation classification of any corporation holding other assets. (return to text)