Is a foreign corporate limited partner in a Texas real-estate partnership subject to franchise tax, and what are the registration, penalty, and interest rules?

Plain-English summary

A taxpayer sent the Comptroller a 16-part inquiry about the (pre-2008) Texas franchise tax as it applied to a foreign corporation involved with a Texas real-estate limited partnership. The core nexus holding (Question 2):

• A foreign corporation that is only a limited partner in a limited partnership owning and operating Texas real estate is not doing business in Texas — so it has no franchise-tax nexus.
• But if that corporation is a general partner in the same partnership, it is doing business in Texas.
• The percentage of interest and whether the activity is passive or active have no relevance to this determination (Rules 3.546 and 3.554).

The letter also walked through the mechanics:

• Registration. A foreign corporation deciding whether to obtain a certificate of authority looks to Business Corporation Act art. 8.01; each authorized foreign corporation must maintain a Texas registered office and agent (art. 8.08), and each taxable corporation must designate a Texas agent for service of process (Tax Code Sec. 171.354).
• Penalties for non-registration. Transacting business without a certificate carries a penalty of not less than $100 nor more than $5,000 per month (art. 8.18); failing to maintain a registered agent can lead to revocation (art. 7.01(B)).
• Reports. The initial report is due 89 days after the first anniversary of beginning business/authorization/charter (whichever is earliest); the annual report is due May 15.
• Late penalties and interest. 5% of tax due if late, plus another 5% if more than 30 days late; delinquent taxes accrue 12% simple interest beginning 60 days after the due date.
• Minimum tax. No minimum tax for reports originally due on or after January 1, 1992; a $68 annual minimum applied for 1990-1991 reports.
• Business loss. A "business loss" is a negative earned surplus after apportionment; losses from tax years ending before January 1, 1991 cannot reduce net taxable earned surplus. Passive-activity losses deducted federally are allowed.

Important currency note: These figures and rules describe the pre-2008 franchise tax, replaced by the current margin tax effective January 1, 2008. Rates, due dates, penalties, and the minimum-tax and loss rules have changed — treat every number here as historical and confirm current law.

What this means for you

Foreign corporations investing in Texas real estate through a partnership

Your franchise-tax exposure turned on general-partner vs. limited-partner status, not on how much you owned or how active you were. A limited partner stayed out; a general partner was in. This is the same distinction that runs through the pre-2008 partnership rulings — and the margin tax has since changed it.

Accountants and tax professionals

Use this letter as a compact reference for the pre-2008 mechanics (registration, penalties, 12% interest, minimum-tax history, business-loss computation), but verify each figure against current law before applying it.

Common questions

Q: Was a foreign corporate limited partner subject to Texas franchise tax?
A: No. A limited partner in a Texas real-estate limited partnership was not doing business in Texas, regardless of its percentage interest.

Q: What about a general partner?
A: A general partner in the same partnership was doing business in Texas and subject to the tax.

Q: What was the penalty for doing business without a certificate of authority?
A: Not less than $100 nor more than $5,000 for each month or fraction of a month (Business Corporation Act art. 8.18).

Citations and references

Statutes and rules:

• Tex. Tax Code Sec. 171.354 (Texas agent for service of process)
• Tex. Bus. Corp. Act art. 8.01 (certificate of authority for a foreign corporation)
• Tex. Bus. Corp. Act art. 8.08 (registered office and agent)
• Tex. Bus. Corp. Act art. 8.18 (penalty for transacting business without a certificate)
• Tex. Bus. Corp. Act art. 7.01(B) (revocation for failing to maintain a registered agent)
• Franchise Tax Rules 3.546 (Taxable Capital: Nexus) and 3.554 (Earned Surplus: Nexus)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9402L1291E09

Original ruling text

February 22, 1994

Dear *:

In your letter of January 20, you raised questions regarding the Texas
franchise tax. I have responded to your questions in the order posed. The facts
outlined in your letter are incorporated by reference.

Question 1
The state of Texas imposes a franchise tax, which consists of a taxable
capital component and an earned surplus component, on each corporation that
does business in this state or that is chartered or authorized to do business
in this state. A copy of the publication summarizing the general provisions of
the tax, The Texas Franchise Tax on Corporations, is enclosed.

Question 2
A foreign (non-Texas) corporation that is a limited partner in a limited
partnership, which owns and operates real estate investments in Texas, is not
doing business in Texas. However, if the corporation is a oral partner in the
same limited partnership, then it is doing business in Texas. The percentage
interest or the nature of the activity (passive or active trade or business)
has no relevance. I have enclosed Rules 3.546, Taxable Capital: Nexus, and
3.554, Earned Surplus: Nexus, which elaborate on specific activities that
constitute doing business in Texas for each component of the franchise tax.

Question 3
Article 8.01, Admission of a Foreign Corporation, of the Texas Business
Corporation Act discusses the aspects each corporation must consider when
deciding whether or not to obtain a Certificate of Authority in this state. The
appropriate forms for registration may be obtained from Secretary of State,
Statutory Filings Division, Corporations Section, P.O. Box 13697, Austin, Texas
78711-3697. Their telephone number is (512) 463-5581.

Question 4
Yes, pursuant to Texas Tax Code Section 171.354, Agent for Service of
Process, each corporation on which a tax is imposed by this chapter (franchise
tax) shall designate a resident of this state as the corporation's agent for
the service of process. Furthermore, Article 8.08, Registered Office and
Registered Agent of Foreign Corporation, of the Texas Business Corporation Act
states in part: Each foreign corporation authorized to transact business in this
State shall have and continuously maintain in this State a registered office and
a registered agent in this State.

Question 5
Article 8.18, Transacting Business Without Certificate of Authority, of
the Texas Business Corporation Act imposes a penalty of "not less than $100.00
nor more than $5000.00 for each month or fraction thereof" a corporation has
transacted business in Texas without a certificate.

A domestic corporation may be dissolved involuntarily and a foreign
corporation's Certificate of Authority may be revoked by order of the Secretary
of State when it is established that the corporation has failed to maintain a
registered agent in this state. (Texas Business Corporation Act, Article
7.01(B))

Question 6
Each corporation subject to the franchise tax must file an initial
franchise tax report and then an annual franchise tax report. The initial
report is due 89 days after the first anniversary of the date the corporation
began doing business in Texas, the date the Certificate of Authority was
issued, or the date the Charter (Texas corporations) was granted, whichever is
earlier. The annual report is due May 15 of each year.

Question 7
A corporation that fails to file a report or pay the tax when the report
is due is subject to a penalty of five percent of the amount of the tax due.
Additionally, if the tax is not paid or the report is not filed within thirty
days after the due date of the report, a penalty of an additional five percent
of the tax due is imposed.

Question 8
The penalty is based on the amount of tax due not the amount of income.
When there is no tax due, the minimum penalty amount is $1.00.

Question 9
Delinquent taxes accrue interest beginning sixty days after the due date
of the report. The yearly interest rate on all delinquent taxes is 12% simple
interest.

Question 10
For reports originally due on or after January 1, 1992, there is no
minimum tax. For the 1990 and 1991 reports, an annual minimum tax of $68.00
applies. Please contact our office for applicable minimum tax amounts for
additional report years.

Question 11
For Texas franchise tax purposes, a "business loss" is a negative earned
surplus amount after apportionment (Item 23 of the report). A business loss
from a tax year that ends before January 1, 1991, may not be used to reduce net
taxable earned surplus.

The computation begins with federal taxable income (before net operating
loss deductions and special deductions). There are specific deductions (Item 20
of the report) that are allowed from this amount as well as an add-back (Item
21 of the report) to this amount to arrive at the earned surplus amount that is
to be apportioned to this state. If the apportioned earned surplus amount is a
negative number, the corporation has a business loss for the report year.

The enclosed instructions for completing the franchise tax report provide
additional information for each item of the report referred to above.

Question 12
Any passive activity losses deducted in arriving at federal taxable
income (before net operating loss deductions and special deductions) are
allowed.

Question 13
A business loss shall be carried forward five years or until the loss is
exhausted, whichever occurs first. A business loss that is carried forward to
a successive year may not reduce below zero the amount of apportioned earned
surplus. Additionally, a business loss from a tax year that ends before January
1, 1991, may not be used to reduce net taxable earned surplus.

Question 14
For franchise tax reports due on or after January 1, 1992, a business
loss is established from information provided on the franchise tax report. A
business loss shall be carried forward five years or until the loss is
exhausted, whichever occurs first.

Question 15
A franchise tax report, even though it is not filed timely, may establish
a 9business loss for that report year. A franchise tax report that is not
filed by its due date is subject to penalties and interest as discussed in
responses to questions 7,8, and 9.

Question 16
No distinction is made between "business" and "non-business" income for
Texas franchise tax purposes.

I have enclosed the current year initial and annual franchise tax reports
with the related instructions. You may contact our office for additional copies
of previous franchise tax reports.

These responses are based on the facts presented in your letter and
current law. If there are additional or different facts, the responses may
change.

If you have any further questions about this or any other franchise tax
matter, you may write me at Tax Administration Division, Comptroller of Public
Accounts. You may call toll free 1-800-531-5441, extension 34932. My direct
number is 512-463-4932.

Sincerely,

Gloria E.R. Dossett
Franchise Tax Policy Section
Tax Administration Division

NOTE: Previous Accession Number 9402146L