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Senate of Pennsylvania
Session of 2015 - 2016 Regular Session


Posted: April 24, 2015 12:26 PM
From: Senator Patrick M. Browne
To: All Senate members
Subject: Investment Company Apportionment
In the near future, I intend to reintroduce legislation that was introduced as Senate Bill 834 of the 2013-14 legislative session. This legislation will address certain problems in the apportionment of a corporate investor in an investment fund.

The requirements with respect to the allocation and apportionment of income by a corporate investor in an investment fund place an undue administrative burden on investment funds located in Pennsylvania and on their corporate investors, to the disadvantage of the investment business in Pennsylvania.

Many investment funds are organized on a flow-through basis for income tax purposes; that is, a corporation includes in its taxable income its prorate share of income from an investment fund. In addition, current law provides that a corporation with an interest in an unincorporated entity is considered the owner of the assets of the unincorporated entity for both nexus and apportionment purposes. These rules are good tax policy in most situations. However, when a corporation owns an interest in an investment fund organized as a flow-through, the results are burdensome and do not constitute good tax policy. A corporation’s income from an investment fund located in Pennsylvania should not create tax nexus here and should not result in the corporation’s other income being taxable here solely because of the investment. Rather, the investment income should be treated as passive income from investments. However, a corporation’s share of income earned in a flow-through entity that conducts an operating business in Pennsylvania should bear its fair share of tax even though the income flows through an investment fund.

To address this problem, the draft legislation will provide rules for three categories of income of a corporate investor.
  • Income from passive investments will not be sitused to Pennsylvania and assets of the investment company will not be deemed to be owned directly by the corporation.
  • Income from an operating business owned directly or indirectly by an investment fund will be allocated to Pennsylvania, with the allocation determined at the operating subsidiary level.
  • All other income of the corporation will be allocated or apportioned as provided by current law.
The operating entity will not have responsibility for withholding if it supplies apportionment information to the investment fund.

The legislation will also remove an investment fund from the category of taxable entities, as an investment fund is not in business in any functional sense; it is simply a pool of passive investments.

A parallel rule will be stated for Capital Stock-Franchise Tax purposes.

Cosponsors of Senate Bill 834 of last session included: Senators MENSCH and RAFFERTY.

Introduced as SB932