Did preparing a Nevada subsidiary's incorporation documents in Texas create franchise-tax nexus for the passive holding company?

Plain-English summary

A Texas attorney's preparation of incorporation documents did not create nexus for the passive Nevada subsidiary, but continued Texas work after formation could.

A Texas parent formed a wholly owned Nevada subsidiary and a Texas limited partnership. After contributions, the parent would own a 1% general-partnership interest and the Nevada subsidiary a 99% limited-partnership interest. The subsidiary would primarily be a passive holding company and hold its annual board meeting outside Texas.

The Comptroller concluded that the Nevada subsidiary had no nexus for taxable capital or earned surplus merely because a Texas attorney prepared its incorporation documents. The response cautioned that continued work by the attorney on the subsidiary's behalf after incorporation might make it subject to tax.

Currency note: This is a pre-2008 franchise-tax nexus ruling. Texas replaced that tax with the margin tax effective January 1, 2008.

What this means for you

Foreign holding companies formed by Texas parents

Formation work and passive investment facts did not create nexus here, but ongoing Texas professional services could change the analysis.

Tax professionals

Separate one-time organizational services from continuing representation. The letter draws its line at post-incorporation work.

Common questions

Q: Where was the subsidiary's board meeting?
A: Outside Texas.

Q: Did Texas document preparation create nexus?
A: No.

Q: Could later legal services create nexus?
A: The letter says they might.

Citations and references

• The letter cites no specific rule in its body; the STAR title references former Rules 3.546 and 3.554.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9903584L

Original ruling text

March 24, 1999

Dear Mr. **:

Thank you for your letter concerning the nexus of a newly formed entity.

You stated in your letter that a Texas Corporation (Parent) will form a wholly
owned Nevada Subsidiary (Nevada Sub) and will transfer cash to Nevada Sub.
Parent and Nevada Sub will then create a Texas Limited Partnership (PNLP).
Parent will contribute its Texas based assets to PNLP for a 1% general
partnership interest and a 98% limited partnership interest in PNLP. Parent
will contribute its 98% limited partnership interest in PLNP to Nevada Sub as a
capital contribution. The end result will be that Parent will own a 1% general
partnership interest in PNLP and Nevada Sub will own a 99% limited partnership
interest in PNLP.

Nevada Sub will hold its annual meeting of its board of directors outside of
Texas. Nevada Sub will primarily be a passive holding company. The legal
documents to incorporate Nevada Sub will be prepared in Texas by a Texas
attorney.

Based on the information provided, the Nevada Sub will not have nexus in Texas
for either component of the Texas franchise tax. If the Texas attorney
continues to perform work on behalf of Nevada Sub subsequent to its
incorporation, however, it may become subject to the franchise tax.

This response is based on current law and the facts presented. If there are
different or additional facts, the response may change.

If you have any questions about this or any other franchise tax matter, please
call me at 1-800-531-5441, extension 34612. My direct number is (512)
463-4612. You may write me at Tax Policy Division, Comptroller of Public
Accounts, Austin, Texas 78774.

Sincerely,

Janet Spies
Tax Policy Division