Connecticut General Statutes 12-218d – Restriction on the deductibility of interest expenses or costs related to certain transactions with related members
(a) As used in this section:
Terms Used In Connecticut General Statutes 12-218d
- another: may extend and be applied to communities, companies, corporations, public or private, limited liability companies, societies and associations. See Connecticut General Statutes 1-1
- Beneficiary: A person who is entitled to receive the benefits or proceeds of a will, trust, insurance policy, retirement plan, annuity, or other contract. Source: OCC
- Combined group: means the group of all companies that have common ownership and are engaged in a unitary business, where at least one company is subject to tax under this chapter. See Connecticut General Statutes 12-213
- Commissioner: means the Commissioner of Revenue Services. See Connecticut General Statutes 12-213
- company: means any person, partnership, association, company, limited liability company or corporation, except an incorporated municipality. See Connecticut General Statutes 12-1
- Contract: A legal written agreement that becomes binding when signed.
- Corporation: A legal entity owned by the holders of shares of stock that have been issued, and that can own, receive, and transfer property, and carry on business in its own name.
- Evidence: Information presented in testimony or in documents that is used to persuade the fact finder (judge or jury) to decide the case for one side or the other.
- Gross income: means gross income, as defined in the Internal Revenue Code, and, in addition, means any interest or exempt interest dividends, as defined in Section 852(b)(5) of the Internal Revenue Code, received by the taxpayer or losses of other calendar or fiscal years, retroactive to include all calendar or fiscal years beginning after January 1, 1935, incurred by the taxpayer which are excluded from gross income for purposes of assessing the federal corporation net income tax, and in addition, notwithstanding any other provision of law, means interest or exempt interest dividends, as defined in said Section 852(b)(5) of the Internal Revenue Code, accrued on or after the application date, as defined in section 12-242ff, with respect to any obligation issued by or on behalf of the state, its agencies, authorities, commissions and other instrumentalities, or by or on behalf of its political subdivisions and their agencies, authorities, commissions and other instrumentalities. See Connecticut General Statutes 12-213
- Internal Revenue Code: means the Internal Revenue Code of 1986, or any subsequent internal revenue code of the United States, as from time to time amended, effective and in force on the last day of the income year. See Connecticut General Statutes 12-213
- Net income: means net earnings received during the income year and available for contributors of capital, whether they are creditors or stockholders, computed by subtracting from gross income the deductions allowed by the terms of section 12-217, except that in the case of a domestic insurance company which is a life insurance company, "net income" means life insurance company taxable income (A) increased by any amount or amounts which have been deducted in the computation of gain or loss from operations in respect of (i) the life insurance company's share of tax-exempt interest, (ii) operations loss carry-backs and capital loss carry-backs, and (iii) operations loss carry-overs and capital loss carry-overs arising in any taxable year commencing prior to January 1, 1973, and (B) reduced by any amount or amounts which have been deducted as operations loss carry-backs or capital loss carry-backs in the computation of gain or loss from operations for any taxable year commencing on or after January 1, 1973, but only to the extent that such amount or amounts would, for federal tax purposes, have been deductible in the taxable year as operations loss carry-overs or capital loss carry-overs if they had not been deducted in a previous taxable year as carry-backs, and provided no expense related to income, the taxation of which by the state of Connecticut is prohibited by the law or . See Connecticut General Statutes 12-213
- Paid: means "paid or accrued" or "paid or incurred" construed according to the method of accounting upon the basis of which net income is computed under this part. See Connecticut General Statutes 12-213
- person: means any individual, partnership, company, limited liability company, public or private corporation, society, association, trustee, executor, administrator or other fiduciary or custodian. See Connecticut General Statutes 12-1
- Received: means "received" or "accrued" construed according to the method of accounting upon the basis of which net income is computed under this part. See Connecticut General Statutes 12-213
(1) “Affiliated group” has the same meaning as in Section 1504 of the Internal Revenue Code.
(2) “Interest expenses and costs” means amounts directly or indirectly allowed as deductions under Section 163 of the Internal Revenue Code.
(3) “Related member” means a person that, with respect to the taxpayer during all or any portion of the taxable year, is: (A) A related entity, as defined in this subsection, (B) a component member, as defined in Section 1563(b) of the Internal Revenue Code, (C) a person to or from whom there is attribution of stock ownership in accordance with Section 1563(e) of the Internal Revenue Code, other than a statutory business trust of which each beneficiary is not a related entity to the taxpayer, or (D) a person that, notwithstanding its form of organization, bears the same relationship to the taxpayer as a person described in subparagraphs (A) to (C), inclusive, of this subdivision.
(4) “Related entity” means (A) a stockholder who is an individual, or a member of the stockholder’s family enumerated in Section 318 of the Internal Revenue Code, if the stockholder and the members of the stockholder’s family own, directly, indirectly, beneficially or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer’s outstanding stock; (B) a stockholder, or a stockholder’s partnership, limited liability company, estate, trust or corporation, if the stockholder and the stockholder’s partnerships, limited liability companies, estates, trusts and corporations own directly, indirectly, beneficially or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer’s outstanding stock; or (C) a corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of the Internal Revenue Code, if the taxpayer owns, directly, indirectly, beneficially or constructively, at least fifty per cent of the value of the corporation’s outstanding stock. The attribution rules of the Internal Revenue Code shall apply for purposes of determining whether the ownership requirements of this subdivision have been met.
(b) For purposes of computing its net income under section 12-217, a corporation shall add back otherwise deductible interest expenses and costs directly or indirectly paid, accrued or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions with, one or more related members.
(c) The adjustments required in subsection (b) of this section shall not apply to an otherwise deductible interest expense or cost if the corporation establishes by clear and convincing evidence, as determined by the commissioner, that: (1) A principal purpose of the transaction giving rise to the payment of interest was not to avoid payment of taxes due under this chapter; (2) the interest is paid pursuant to a contract that reflects an arm’s length rate of interest and terms; and (3) either (A) (i) the related member was subject to tax on its net income in this state or another state or possession of the United States or a foreign nation; (ii) a measure of said tax included the interest received from the corporation; and (iii) the rate of tax applied to the interest received by the related member is no less than the statutory rate of tax applied to the corporation under section 12-214, without regard to subsection (b) of section 12-214, minus three percentage points, or (B) the related member is a company subject to tax under chapter 207 or comparable tax under the laws of another state.
(d) The adjustments required in subsection (b) of this section shall not apply in any of the following circumstances:
(1) The corporation establishes by clear and convincing evidence, as determined by the commissioner, that the adjustments are unreasonable.
(2) The corporation and the commissioner agree in writing to the application or use of an alternative method of determining the combined measure of the tax, provided the Commissioner of Revenue Services shall consider approval of such petition only in the event that the petitioners have clearly established to the satisfaction of said commissioner that there are substantial intercorporate business transactions among such included corporations and that the proposed alternative method of determining the combined measure of the tax accurately reflects the activity, business, income or capital of the taxpayers within the state.
(3) The corporation elects, on forms authorized for such purpose by the commissioner, to calculate its tax on a unitary basis including all members of the unitary group, provided there are substantial intercorporate business transactions among such included corporations. Such election to file on a unitary basis shall be irrevocable for and applicable for five successive income years, but shall not be applicable to income years commencing on or after January 1, 2016. Nothing in this subsection shall be construed to limit or negate the commissioner’s authority to otherwise enter into agreements and compromises otherwise allowed by law.
(4) The corporation and the related member are both members of a combined group required to file a combined unitary tax return pursuant to section 12-222.
(e) The adjustments required in subsection (b) of this section shall not apply if interest is paid to a related member located in a country with which the United States has a comprehensive income tax treaty.
(f) (1) Gross income, as defined in section 12-213, shall not include any amount received or accrued from a related member that is added back to the preapportionment income of such related member pursuant to subsection (b) of this section.
(2) The receipts factor determined under section 12-218 or 12-218b shall not include any amount received or accrued from a related member that is added back to the preapportionment income of such related member pursuant to subsection (b) of this section.
(g) Nothing in this section shall require a corporation to add to its net income more than once any amount of interest expenses and costs that the corporation pays, accrues or incurs to a related member described in subsection (b) of this section.
(h) Nothing in this section shall be construed to limit or negate the commissioner’s authority to make adjustments under section 12-221a or 12-226a.