|Posted:||January 13, 2017 03:35 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 932 of the 2015-16 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.
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 932 of last session included: Senators MENSCH and RAFFERTY.
Introduced as SB345