Did a Canadian corporation remain subject to Florida corporate income tax if it revoked its federal election to treat Florida rental income as connected with a U.S. trade or business?

Plain-English summary

Florida required the Canadian corporation to file and pay Florida corporate income tax because its Florida real-estate partnership interest created nexus. The limited partnership owned commercial real estate in Florida and leased it to an unrelated party. Florida taxed the corporate partner on its share of the partnership's Florida activities.

Federal election did not control Florida nexus

The corporation had elected federally to treat the rental income as effectively connected with a U.S. trade or business and proposed seeking revocation. Florida said revocation would not change the underlying Florida nexus. Eliminating the limited partnership also would not help if the corporation retained an ownership interest in Florida realty.

The ruling further concluded that the U.S.-Canada income-tax treaty addressed federal tax and did not limit Florida's ability to impose its corporate income tax. The Florida tax base remained tied to income properly reportable for U.S. income-tax purposes.

What this means for you

A foreign corporation should analyze Florida property and partnership activity separately from its federal effectively-connected-income election and federal return form. A change in federal reporting position did not erase state nexus on these facts.

Common questions

Q: Did the absence of a Florida office or employees prevent nexus?
A: No. The Florida limited-partnership interest and Florida rental property were sufficient on the ruling's facts.

Q: Would revoking the federal election eliminate Florida filing?
A: No. Florida treated nexus and the filing obligation as continuing.

Q: Did the U.S.-Canada treaty block Florida tax?
A: No. The ruling said the treaty governed the federal income tax and did not limit Florida.

Q: What income did Florida use?
A: The ruling said Florida tax was based on the amount properly reportable for U.S. income-tax purposes.

Citations and references

• Fla. Stat. § 220.02 — corporate income-tax intent
• Fla. Stat. § 220.11 — corporate income-tax imposition
• Fla. Stat. § 220.13 — adjusted federal income
• Fla. Admin. Code rr. 12C-1.002, 12C-1.011, and 12C-1.022 — foreign-corporation filing rules
• IRC §§ 881 and 882 — federal treatment discussed in the ruling
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 03C1-003

Original ruling text

SUMMARY

QUESTION: If the Internal Revenue Service were to accept
the Taxpayer's revocation of its election to be engaged in
a U.S. trade or business, how will the rental income be
treated for purposes of the Florida corporate income tax?

ANSWER - Based on Facts Below: The Taxpayer has nexus with
Florida and is required to file and pay Florida corporate
income tax. Whether the Internal Revenue Service allows
the Taxpayer to revoke its election to treat its rental
income as effectively connected with a United States trade
or business has no impact on the fact that the Taxpayer has
nexus with Florida. The Taxpayer is still required to file
and pay Florida corporate income tax based on the amount of
its United States income.

Sep 03, 2003

Re: Technical Assistance Advisement 03C1-003
Corporate Income Tax
Taxpayer's Subjectivity to Tax
Sections 220.02, 220.11, and 220.13, F.S.
Rules 12C-1.002, 12C-1.011, and 12C-1.022, F.A.C.
XXX (XXX) (hereinafter referred to as "Taxpayer")

Dear :

Your letter of XX, requests advice on the application of the
Florida corporate income tax to a Canadian company that owns an
interest in a Florida limited partnership that invests in
Florida real estate. This response to your request constitutes
a Technical Assistance Advisement under Chapter 12-11, Florida
Administrative Code, and is issued to you under authority of s.
213.22, Florida Statutes.

FACTS SUPPLIED BY TAXPAYER

The Taxpayer is a corporation organized under the laws of
Canada. The Taxpayer states that it does not maintain an office
or have employees in Florida or elsewhere in the United States.
The Taxpayer has a XX interest in a Florida real estate limited
partnership that owns commercial real estate in Florida that is
leased to an unrelated third party. The general partners in the
limited partnership are the Taxpayer and a XXX. The Florida
limited partnership does not employ any individuals, and it does
not have an office or any other type of permanent establishment
in Florida or the U.S.

For the XX tax year, the Taxpayer filed both federal and Florida
corporate income tax returns and reported the net rental
activity that was passed through the limited partnership.

The Taxpayer made a federal election to be treated as if it were
engaged in a U.S. trade or business. The Internal Revenue
Service has not made a determination on whether the Taxpayer is
engaged in a U.S. trade or business. The Taxpayer will attempt
to revoke its federal election of being treated as if it were
engaged in a U.S. trade or business. If the Internal Revenue
Service were to grant such a revocation of the Taxpayer's
election and determine that the Taxpayer is not engaged in a
U.S. trade or business, the Taxpayer would be subject to a 30%
tax on the gross proceeds from the rental activity of the
limited partnership under section 881, I.R.C. This 30% tax is
withheld by a United States withholding agent and sent to the
Internal Revenue Service. This 30% withholding amount is the
United States income tax due.

ISSUE PRESENTED

If the Internal Revenue Service were to accept the Taxpayer's
revocation of its election to be engaged in a U.S. trade or
business, how will the rental income be treated for purposes of
the Florida corporate income tax?

LEGAL AUTHORITY

Section 220.02, F.S., states in part:

(1) It is the intent of the Legislature in enacting this
code to impose a tax upon all corporations, organizations,
associations, and other artificial entities which derive
from this state or from any other jurisdiction permanent
and inherent attributes not inherent in or available to
natural persons, such as perpetual life, transferable
ownership represented by shares or certificates, and
limited liability for all owners.... It is the intent of
the Legislature to subject such corporations and other
entities to taxation hereunder for the privilege of
conducting business, deriving income, or existing within
this state. This code is not intended to tax, and shall not
be construed so as to tax, any natural person who engages
in a trade, business, or profession in this state under his
or her own or any fictitious name, whether individually as
a proprietorship or in partnership with others, or as a
member or a manager of a limited liability company
classified as a partnership for federal income tax
purposes; any estate of a decedent or incompetent; or any
testamentary trust. However, a corporation or other taxable
entity which is or which becomes partners with one or more
natural persons shall not, merely by reason of being a
partner, exclude from its net income subject to tax its
respective share of partnership net income. This statement
of intent shall be given preeminent consideration in any
construction or interpretation of this code in order to
avoid any conflict between this code and the mandate in s.
5, Art. VII of the State Constitution that no income tax be
levied upon natural persons who are residents and citizens
of this state.
...
(3) It is the intent of the Legislature that the income tax
imposed by this code utilize, to the greatest extent
possible, concepts of law which have been developed in
connection with the income tax laws of the United States,
in order to:

(a) Minimize the expenses of the Department of Revenue and
difficulties in administering this code;

(b) Minimize the costs and difficulties of taxpayer

compliance; and

(c) Maximize, for both revenue and statistical purposes,
the sharing of information between the state and the
Federal Government.

(4) It is the intent of the Legislature that the tax
imposed by this code be prospective in effect only.
Consistent with this intention and the intent expressed in
subsection (3), it is hereby declared to be the intent of
the Legislature that:

(a) "Income," for purposes of this code, including gains
from the sale, exchange, or other disposition of property,
be deemed to be created for Florida income tax purposes at
such time as such income is realized for federal income tax
purposes;

(b) No accretion of value, no accrual of gain, and no
acquisition of a right to receive or accrue income which
has occurred or been generated prior to November 2, 1971,
be deemed to be "property," or an interest in property, for
any purpose under this code; and

(c) All income realized for federal income tax purposes
after November 2, 1971, be subject to taxation in full by
this state and be taxed in the manner and to the extent
provided in this code.
...

Section 220.03(1)(s), F.S., states:

"Partnership" includes a syndicate, group, pool, joint
venture, or other unincorporated organization through or by
means of which any business, financial operation, or
venture is carried on, including a limited partnership; and
the term "partner" includes a member having a capital or a
profits interest in a partnership.

Section 220.11, F.S., states in part:

(1) A tax measured by net income is hereby imposed on every
taxpayer for each taxable year commencing on or after
January 1, 1972, and for each taxable year which begins
before and ends after January 1, 1972, for the privilege of
conducting business, earning or receiving income in this
state, or being a resident or citizen of this state. Such
tax shall be in addition to all other occupation, excise,
privilege, and property taxes imposed by this state or by
any political subdivision thereof, including any
municipality or other district, jurisdiction, or authority
of this state.
...

Rule 12C-1.002, F.A.C., provides a declaration of intent and
states:

Corporations and other artificial entities which are to
become partners in a partnership which conducts business,
derives income or exists within the state shall be subject
to tax under the Florida Income Tax Code, without regard to
any other factor which would determine the tax status of
that partner for Florida income tax purposes. The
partnership's conduct of business, derivation of income or
existence within Florida shall be deemed attributable to
the partners, rather than to the partnership itself.

Rule 12C-1.011(1), F.A.C., states in part:

(1) The following activities, notwithstanding others within
the meaning of taxable privileges described in s. 220.02,
F.S., will be construed as conducting business, earning or
receiving income in this state, or constitute those
activities of a resident or citizen of this state for
purposes of this tax, and corporations participating
therein are subject to taxation unless exempted by the
constitution or the laws of the United States or this
state.
...
(c)1. Owning or leasing real or tangible personal property
in this state.
...

(v) Foreign (out-of-state) corporations not otherwise
subject to the law but who are partners or members of
Florida partnerships or joint ventures are subject to the
law by virtue of their membership in such partnerships or
joint ventures. Florida partnerships are partnerships doing
business, deriving income, or existing in Florida. A
partnership will be considered to be existing within
Florida if an active partner who participates in management
decisions has permanent or extended temporary residency
(for 3 months in the aggregate of a 12 month period) within
the state. If an active partner is residing within the
state, management of the partnership is presumed to be
occurring within the state.
...

Rule 12C-1.022(3), F.A.C. (10/02/2001), states:

(3) Foreign (non-U.S.) corporations.

(a) Every foreign (non-U.S.) corporation subject to the
Florida Income Tax Code shall make a return of income for
each taxable year such corporation is either liable for tax
under the Florida Income Tax Code, or is required to make a
federal income tax return, regardless of whether such
taxpayer is liable for tax under the Florida Income Tax
Code.

(b) Foreign corporations which are not considered under the
Internal Revenue Code to have income effectively connected
with a U.S. trade or business, but for which any tax is due
under the provisions of s. 1442, I.R.C., will be required
to file a Florida corporate income/franchise tax return.

(c) If a foreign corporation has been exempted by treaty
from filing an F-1120, there will be no filing requirement
for Florida income tax purposes. If a federal return is
required to claim exempt status under the provision of a
treaty, a corporation will be required to file a Florida
return for each year it is required to file a federal
return.

(d)1. Treasury Regulation 1.882-4(a)(3)(iv) provides that a
foreign corporation may file a return for a taxable year
and thereby protect the right to receive the benefit of the
deductions and credits attributable to that gross income if
it is later determined that the foreign corporation's
activities do create gross income effectively connected
with the conduct of a trade or business within the United
States. On that timely filed return, the corporation is not
required to report any gross income as effectively
connected with a United States trade or business or any
deductions or credits, but should attach a statement
indicating that the return is being filed under the
provisions of Treas. Reg. 1.882-4(a)(3). Because this
"protective return" is considered under the Treasury
Regulations to be a true and accurate return which is
required to be filed to protect possible benefits, it will
be considered a required return for Florida tax purposes.
Therefore, if a foreign corporation files a protective
return under the provisions of Treas. Reg. 1.882-4(a)(3),
it will be required to file a Florida corporate income tax
return.

2. Because the corporation is not considered to have
   taxable income for federal purposes, it would not be
   considered to have taxable income for Florida purposes.
   Therefore, the Florida return would not reflect items of
   income, gain, deductions, losses, etc. The foreign
   corporation would be required to attach a copy of the
   federal return as filed, including the statement attached
   to the federal return indicating that the return is being
   filed under the provisions of Treas. Reg. 1.882-4(a)(3).
   (emphasis supplied)

Rule 12C-1.022(3)(b), F.A.C. (prior to 10/02/2001), stated:

(b) Foreign corporations which are not considered under the
Internal Revenue Code to have income effectively connected
with a U.S. trade or business, and for which any tax due is
withheld at the source under the provisions of s. 1442,
I.R.C., will not be required to file a Florida corporate
income/franchise tax return. (emphasis supplied)

DISCUSSION AND ANALYSIS

The Taxpayer is a Canadian corporation, and the United States'
ability to impose an income tax on the Taxpayer is governed by
the United States and Canadian Income Tax Treaty. By its very
terms, the Treaty explicitly relates to the federal income tax
imposed by the Internal Revenue Code. Article VI of the
Treaty/Convention allows each contracting state (United States
or Canada) to impose tax on such income under its internal law.
See the Treasury Department Technical Explanation of the
Convention Between the United States and Canada. The Treaty
does not limit Florida's ability to impose an income tax on the
Taxpayer.

For United States income tax purposes, Canadian taxpayers only
receiving rental income are generally subject to 30 percent
income tax on all gross receipts from the United States,
including Florida, because the income is not generated from a
trade or business in the United States. See section 881,
Internal Revenue Code. This 30 percent income tax is withheld
by the United States entity that is paying rent to the Canadian
company or the United States entity that is passing the rent
payments to the Canadian company. The Canadian company does not
have to file an income tax return with the Internal Revenue
Service unless it wants to claim the withheld amount in an
income tax filing.

Under section 882, Internal Revenue Code, if a Canadian taxpayer
is not conducting a trade or business in the United States, it
may elect to treat its rental income from its United States real
property as income effectively connected with a United States
trade or business and pay the regular United States income tax.
By making this election, a Canadian taxpayer can deduct the
expenses associated with the creation of the rental income,
including depreciation, and pay the regular United States income
tax on the net income from the United States real property
instead of the 30 percent tax under section 881, I.R.C.

The intent of the Florida Legislature in enacting the Florida
corporate income tax is that corporations and other entities

conducting business, deriving income, or existing within Florida
pay a corporate income tax to Florida. See s. 220.02, F.S. The
Taxpayer is deriving income from its investment in a Florida
limited partnership. Florida does not currently tax limited
partnerships directly. Instead, Florida taxes the partners and
limited partners based on their share of the limited
partnership's activities in Florida.

A corporation with an interest in a partnership, which conducts
business in Florida, is subject to the Florida corporate income
tax. The definition of a partnership, as the term is used in
the Chapter 220, F.S., and the rules, includes limited
partnerships. See s. 220.03(1)(s), F.S. Since the Taxpayer has
an interest in a limited partnership that owns real property in
Florida and conducts business in Florida, it is subject to the
Florida corporate income tax. Even if the Taxpayer were to
eliminate the limited partnership, it would still have an
ownership interest in Florida realty and would still be subject
to the Florida corporate income tax. Based on the above
discussion, it is clear that the Taxpayer has established nexus
with Florida and is subject to the Florida corporate income tax.

Rule 12C-1.022(3), F.A.C., requires foreign corporations that do
not have income effectively connected with a U.S. trade or
business, but are subject to the 30% withholding requirement
under the provisions of s. 1442, I.R.C., to file Florida
corporate income tax returns. This rule was changed effective
October 2, 2001, to clarify that Florida law mandates that
corporations who are required to pay United States income tax,
but are not required to file United States income tax returns,
are required to file Florida corporate income tax returns when
United States income tax is due, regardless of whether a United
States income tax return is required to be filed. Therefore,
even if the Internal Revenue Service were to grant the
Taxpayer's request to revoke its election to treat its real
estate activity as not effectively connected with a United
States trade or business, the Taxpayer would still be required
to file Florida corporate income tax returns.

Based on the discussion above, the Taxpayer is required to file
a Florida corporate income tax return. This Florida corporate

income tax is based on the amount of income properly reportable
for United States income tax purposes.

CONCLUSION

The Taxpayer has nexus with Florida and is required to file
returns and pay Florida corporate income tax. Whether the
Internal Revenue Service allows the Taxpayer to revoke its
election to treat its rental income as effectively connected
with a United States trade or business, and/or whether the
Taxpayer eliminates the limited partnership, has no impact on
the fact that the Taxpayer has nexus with Florida. The Taxpayer
is still required to file returns and pay Florida corporate
income tax based on the amount of its United States income.

This response constitutes a Technical Assistance Advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
based on those facts and specific situation summarized above.
You are advised that subsequent statutory or administrative rule
changes or judicial interpretations of the statutes or rules
upon this advice is based may subject future transactions to a
different treatment than expressed in this response.

You are further advised that this response, your request and
related backup documents are public records under Chapter 119,
F.S., and are subject to disclosure to the public under the
conditions of s. 213.22, F.S. Confidential information must be
deleted before public disclosure. In an effort to protect
confidentiality, we request you provide the undersigned with an
edited copy of your request for Technical Assistance Advisement,
the backup material and this response, deleting names, addresses
and any other details which might lead to identification of the
taxpayer. Your response should be received by the Department
within 15 days of the date of this letter.

Sincerely,

Robert DuCasse
Technical Assistance and Dispute

Resolution

RCD/rd
Control No.: 56164