§ 6-3-2-20 — Corporations; intangible expenses; directly related interest expenses; exceptions

Indiana § 6-3-2-20

• Jurisdiction: Indiana
• Art. 3: STATE INCOME TAXES
• Ch. 2: Imposition of Tax and Deductions

Text

(a) The following definitions apply throughout
this section:
(1) "Affiliated group" has the meaning provided in Section 1504
of the Internal Revenue Code, except that the ownership
percentage in Section 1504(a)(2) of the Internal Revenue Code
shall be determined using fifty percent (50%) instead of eighty
percent (80%).
(2) "Directly related interest expenses" means interest expenses
that are paid to, or accrued or incurred as a liability to, a recipient
if:
(A) the amounts represent, in the hands of the recipient, income
from making one (1) or more loans; and
(B) the funds loaned were originally received by the recipient
from the payment of expenses by any of the following:
(i) The taxpayer.
(ii) A member of the same affiliated group as the taxpayer.
(iii) A foreign corporation.
(3) "Foreign corporation" means a corporation that is organized
under the laws of a country other than the United States and
would be a member of the same affiliated group as the taxpayer
if the corporation were organized under the laws of the United
States.
(4) "Intangible expenses" means the following amounts to the
extent these amounts are allowed as deductions in determining
taxable income under Section 63 of the Internal Revenue Code
before the application of any net operating loss deduction and
special deductions for the taxable year:
(A) Expenses, losses, and costs directly for, related to, or in
connection with the acquisition, use, maintenance,
management, ownership, sale, exchange, or any other
disposition of intangible property.
(B) Royalty, patent, technical, and copyright fees.
(C) Licensing fees.
(D) Other substantially similar expenses and costs.
(5) "Intangible property" means patents, patent applications, trade
names, trademarks, service marks, copyrights, trade secrets, and
substantially similar types of intangible assets.
(6) "Interest expenses" means amounts that are allowed as
deductions under Section 163 of the Internal Revenue Code in
determining taxable income under Section 63 of the Internal
Revenue Code before the application of any net operating loss
deductions and special deductions for the taxable year.
(7) "Makes a disclosure" means a taxpayer provides the following
information regarding a transaction with a member of the same
affiliated group or a foreign corporation involving an intangible
expense or a directly related interest expense with the taxpayer's
tax return on the forms prescribed by the department:
(A) The name of the recipient.
(B) The state or country of domicile of the recipient.
(C) The amount paid to the recipient.
(D) A copy of federal Form 851, Affiliation Schedule, as filed
with the taxpayer's federal consolidated tax return.
(E) The information needed to determine the taxpayer's status
under the exceptions listed in subsection (c).
(8) "Recipient" means:
(A) a member of the same affiliated group as the taxpayer; or
(B) a foreign corporation;
to which is paid an item of income that corresponds to an
intangible expense or a directly related interest expense.
(9) "Unrelated party" means a person that, with respect to the
taxpayer, is not a member of the same affiliated group or a foreign
corporation.
(b) Except as provided in subsection (c), in determining its adjusted
gross income under IC 6-3-1-3.5(b), a corporation subject to the tax
imposed by IC 6-3-2-1 shall add to its taxable income under Section 63
of the Internal Revenue Code:
(1) all intangible expenses; and
(2) all directly related interest expenses;
paid, accrued, or incurred with one (1) or more members of the same
affiliated group or with one (1) or more foreign corporations.
(c) The addition of intangible expenses or directly related interest
expenses otherwise required in a taxable year under subsection (b) is
not required if one (1) or more of the following apply to the taxable
year:
(1) The taxpayer and the recipient are both included in the same
consolidated tax return filed under IC 6-3-4-14 or in the same
combined return filed under IC 6-3-2-2(q) for the taxable year.
(2) If the recipient receives an item of income that corresponds to
the directly related interest expenses and the recipient:
(A) is subject to the financial institutions tax under IC 6-5.5;
(B) files a return under IC 6-5.5; and
(C) apportions the items of income that correspond to the
intangible expenses and the directly related interest expenses in
accordance with IC 6-5.5.
(3) The taxpayer makes a disclosure and, at the request of the
department, can establish by a preponderance of the evidence
that:
(A) the item of income corresponding to the intangible
expenses or the directly related interest expenses was included
within the recipient's income that is subject to tax in:
(i) a state or possession of the United States; or
(ii) a country other than the United States;
that is the recipient's commercial domicile and that imposes a
net income tax, a franchise tax measured, in whole or in part, by
net income, or a value added tax;
(B) the transaction giving rise to the intangible expenses or the
directly related interest expenses between the taxpayer and the
recipient was made at a commercially reasonable rate and at
terms comparable to an arm's length transaction; and
(C) the transactions giving rise to the intangible expenses or the
directly related interest expenses between the taxpayer and the
recipient did not have Indiana tax avoidance as the principal
purpose.
(4) The taxpayer makes a disclosure and, at the request of the
department, can establish by a preponderance of the evidence
that:
(A) the recipient regularly engages in transactions with one (1)
or more unrelated parties on terms substantially similar to those
of the subject transaction; and
(B) the transaction giving rise to the intangible expenses or the
directly related interest expenses between the taxpayer and the
recipient did not have Indiana tax avoidance as the principal
purpose.
(5) The taxpayer makes a disclosure and, at the request of the
department, can establish by a preponderance of the evidence
that:
(A) the payment was received from a person or entity that is an
unrelated party, and on behalf of that unrelated party, paid that
amount to the recipient in an arm's length transaction; and
(B) the transaction giving rise to the intangible expenses or the
directly related interest expenses between the taxpayer and the
recipient did not have Indiana tax avoidance as the principal
purpose.
(6) The taxpayer makes a disclosure and, at the request of the
department, can establish by a preponderance of the evidence
that:
(A) the recipient paid, accrued, or incurred a liability to an
unrelated party during the taxable year for an equal or greater
amount that was directly for, related to, or in connection with
the same property giving rise to the expenses; and
(B) the transactions giving rise to the intangible expenses or the
directly related interest expenses between the taxpayer and the
recipient did not have Indiana tax avoidance as the principal
purpose.
(7) The taxpayer makes a disclosure and, at the request of the
department, can establish by a preponderance of the evidence
that:
(A) the recipient is engaged in:
(i) substantial business activities from the acquisition, use,
licensing, maintenance, management, ownership, sale,
exchange, or any other disposition of intangible property; or
(ii) other substantial business activities separate and apart
from the business activities described in item (i);
as evidenced by the maintenance of a permanent office space
and an adequate number of full-time, experienced employees;
(B) the transactions giving rise to the intangible expenses or the
directly related interest expenses between the taxpayer and the
recipient did not have Indiana tax avoidance as the principal
purpose; and
(C) the transaction was made at a commercially reasonable rate
and at terms comparable to an arm's length transaction.
(8) The taxpayer and the department agree, in writing, to the
application or use of an alternative method of allocation or
apportionment under section 2(l) or 2(m) of this chapter.
(9) Upon request by the taxpayer, the department determines that
the adjustment otherwise required by this section is unreasonable.
(d) For purposes of this section, intangible expenses or directly
related interest expenses shall be considered to be at a commercially
reasonable rate or at terms comparable to an arm's length transaction
if the intangible expenses or directly related interest expenses meet the
arm's length standards of United States Treasury Regulation
1.482-1(b).
(e) If intangible expenses or directly related interest expenses are
determined not to be at a commercially reasonable rate or at terms
comparable to an arm's length transaction for purposes of this section,
the adjustment required by subsection (b) shall be made only to the
extent necessary to cause the intangible expenses or directly related
interest expenses to be at a commercially reasonable rate and at terms
comparable to an arm's length transaction.
(f) For purposes of this section, transactions giving rise to intangible
expenses or the directly related interest expenses between the taxpayer
and the recipient shall be considered as having Indiana tax avoidance
as the principal purpose if:
(1) there is not one (1) or more valid business purposes that
independently sustain the transaction notwithstanding any tax
benefits associated with the transaction; and
(2) the principal purpose of tax avoidance exceeds any other valid
business purpose.

Legislative History

As added by P.L.162-2006, SEC.26. Amended by P.L.211-2007, SEC.21; P.L.250-2015, SEC.24.