Does a New York corporation qualify for New York's reduced 'small business taxpayer' franchise tax rates if it is wholly owned by a foreign (non-U.S.) parent whose own income and capital exceed the small business thresholds?

Subject

Whether a New York State corporation that is a wholly owned subsidiary of a foreign corporation qualifies as a "small business taxpayer" under Tax Law § 210.1(f).

Plain-English summary

Corporation "N" is a New York corporation, 100% owned by "F," a foreign (non-U.S.) corporation with no other nexus or activity anywhere in the United States. N has no subsidiaries of its own. On its own numbers, N has income under $290,000 and capital/paid-in surplus under $1,000,000 — comfortably within New York's "small business taxpayer" thresholds, which qualify a corporation for reduced Article 9-A tax rates (as low as 8% instead of 9% on the entire net income base). The wrinkle: F, once its overseas financials are translated into U.S. dollars, has income and capital well above those thresholds. The question was whether N had to be tested together with its much larger foreign parent.

The Department ruled N qualifies as a small business taxpayer on its own. The third test in § 210.1(f) disqualifies a corporation only if it's part of a federal "affiliated group" (IRC § 1504) that, tested on a combined basis, wouldn't itself qualify as a small business. But IRC § 1504(b)(3) excludes foreign corporations from being "includible corporations" in an affiliated group in the first place. Since F is foreign, N and F never form an affiliated group under federal law — so there's no combined-group test to fail, and N is measured purely on its own income and capital, both of which come in under the thresholds.

What this means for you

New York subsidiaries of foreign parents

Owning a small New York subsidiary through a large foreign parent doesn't automatically disqualify the subsidiary from New York's reduced small-business tax rates. Because foreign corporations can't be "includible corporations" in a federal affiliated group, the combined-group disqualification test in § 210.1(f)(iii) generally doesn't reach a foreign parent-subsidiary structure — the New York subsidiary is judged on its own numbers.

Accountants and tax professionals

All three prongs of § 210.1(f) matter: (i) entire net income ≤ $290,000, (ii) capital/paid-in surplus ≤ $1,000,000 (the IRC § 1244(c)(3) small business corporation threshold), and (iii) not part of a disqualifying federal affiliated group. Prong (iii) is where a foreign parent structure helps — it's not that the parent's size doesn't matter, it's that a foreign parent can't create an "affiliated group" under IRC § 1504 at all, so there's nothing to combine.

U.S. subsidiaries of domestic vs. foreign parents — know the contrast

This result would likely flip if the parent were a domestic (U.S.) corporation large enough to make the combined group fail the small-business thresholds — domestic parents and subsidiaries generally can form an affiliated group under § 1504(a). The foreign-parent fact pattern here is what let corporation N stand alone.

Common questions

Q: Does a large foreign parent disqualify its small New York subsidiary from small-business tax rates?
A: Not under these facts. Because the parent is a foreign corporation, IRC § 1504(b)(3) excludes it from being part of an "affiliated group," so the subsidiary is tested on its own income and capital alone.

Q: What if the subsidiary itself had other U.S. subsidiaries?
A: This ruling didn't address that — here, N had no subsidiaries of its own, and F's only U.S. subsidiary was N.

Q: Can another New York subsidiary of a foreign parent rely on this ruling?
A: No. This advisory opinion binds the Department only for the taxpayer and facts presented, and cannot be relied on by anyone else.

Citations and references

Statutes and regulations:

• Tax Law § 210.1(a) (reduced tax rates for small business taxpayers)
• Tax Law § 210.1(f) (three-part definition of "small business taxpayer")
• 26 U.S.C. § 1244(c)(3) (federal small business corporation capital/paid-in surplus threshold)
• 26 U.S.C. § 1504 (definition of "affiliated group"; foreign corporations excluded as "includible corporations")

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_2c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(2)C
Corporation Tax
January 11, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C891120A

On November 20, 1989, a Petition for Advisory Opinion was received from Richard Berman,
CPA, 860 Longview Avenue, Valley Stream, New York 11581.
The issue raised by Petitioner, Richard Berman, CPA, is whether a New York State
corporation which is a wholly owned subsidiary of a foreign corporation qualifies as a "small
business taxpayer" pursuant to Section 210.1(f) of the Tax Law.
Corporation "N" is a New York State corporation 100% owned by "F" a foreign corporation.
"F" has no nexus or activity in New York State or in any of the other states of the United States. "N"
has no subsidiaries in New York State or in any other state of the United States. The only subsidiary
of "F" in the United States is "N".
"N" has income of less than $290,000 for the taxable year and capital and paid in surplus of
less than $1,000,000."F" upon translating its financial statement into U.S. dollars has income for the
taxable year greater than $290,000 and capital and paid in surplus of more than $1,000,000.
Section 210.1(a) of the Tax Law provides:
Entire net income base. The amount prescribed by this paragraph
shall be computed at the rate of nine percent of the taxpayer's entire
net income base. The taxpayer's entire net income base shall mean
the portion of the taxpayer's entire net income allocated within the
state as hereinafter provided, subject to any modification required by
paragraphs (d) and (e) of subdivision three of this section. However,
in the case of a small business taxpayer, as defined in paragraph (f)
of this subdivision, the amount prescribed by this paragraph shall be
computed as follows:
(i) if the entire net income base is not more than two hundred
thousand dollars, the amount shall be eight percent of the entire net
income base; (ii) if the entire net income base is more than two
hundred thousand dollars but not over two hundred ninety thousand
dollars the amount shall be the sum of (a) sixteen thousand dollars,
(b) nine percent of the excess of the entire net income base over two
hundred thousand dollars and (c) five percent of the excess of the
entire net income base over two hundred fifty thousand dollars.
TP-9 (9/88)

-2­
TSB-A-90(2)C
Corporation Tax
January 11, 1990
Section 210.1(f) of the Tax Law provides:
For purposes of this section, the term "small business taxpayer" shall
mean a taxpayer (i) which has an entire net income of not more than
two hundred ninety thousand dollars for the taxable year; (ii)which
constitutes a small business as defined in section1244(c)(3) of the
internal revenue code (without regard to the second sentence of
subparagraph (A) thereof) as of the last day of the taxable year; and
(iii) which is not part of an affiliated group, as defined in section
1504 of the internal revenue code, unless such group, if it had filed a
report under this article on a combined basis, would have itself
qualified as a "small business taxpayer" pursuant to this subdivision.
Section 1244(c)(3) of the Internal Revenue Code provides:
SMALL BUSINESS CORPORATION DEFINED.-­
(A) IN GENERAL.--For purposes of this section, a corporation shall
be treated as a small business corporation if the aggregate amount of
money and other property received by the corporation for stock, as a
contribution to capital, and as paid-in surplus, does not exceed
$1,000,000. The determination under the preceding sentence shall be
made as of the time of the issuance of the stock in question but shall
include amounts received for such stock and for all stock theretofore
issued.
(B) AMOUNT TAKEN INTO ACCOUNT WITH RESPECT TO
PROPERTY.--For purposes of subparagraph (A), the amount taken
into account with respect to any property other than money shall be
the amount equal to the adjusted basis to the corporation of such
property for determining gain, reduced by any liability to which the
property was subject or which was assumed by the corporation. The
determination under the preceding sentence shall be made as of the
time the property was received by the corporation.
Section 1504 of the Internal Revenue Code provides in part:
(a) AFFILIATED GROUP DEFINED.--For purposes of this subtitle-­
(1) IN GENERAL.--The term "affiliated group" means-­
(A) 1 or more chains of includible corporations connected through
stock ownership with a common parent corporation which is an
includible corporation, but only if–

-3­
TSB-A-90(2)C
Corporation Tax
January 11, 1990
(B)(i) the common parent owns directly stock meeting the
requirements of paragraph (2) in at least 1 of the other includible
corporations, and
(ii) stock meeting the requirements of paragraph (2) in each of the
includible corporations (except the common parent) is owned directly
by 1 or more of the other includible corporations...
(b) DEFINITION OF "INCLUDIBLE CORPORATION".--As used
in this chapter, the term "includible corporation" means any
corporation except--...
(3) Foreign corporations...
In the instant case corporation "N" meets the first test of Section 210.1(f) in that its entire net
income for the taxable year is not more than $290,000.00.
Corporation "N" also meets the second test of Section 210.1(f) in that its capital and paid in
surplus does not exceed $1,000,000 which is the maximum amount allowed in order for a company
to be considered a small business as defined in Section 1244(c)(3) of the Internal Revenue Code.
Finally corporation "N" meets the third test of Section 210.1(f). Its parent corporation "F"
is not an includible corporation in an affiliated group since it is a foreign corporation as defined in
Section 1504(b)(3) of the Internal Revenue Code. Hence corporation "N" and corporation "F" do
not constitute an affiliated group in accordance with the meaning of Section 1504(a)(1) of the
Internal Revenue Code.
It is therefore concluded that corporation "N" is a qualifying small business in accordance
with the meaning and intent of Section 210.1(f) and thus is entitled to pay the reduced tax imposed
on small business taxpayers by Section 210.1(a) of the Tax Law.

DATED: January 11, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.