Is a Canadian corporation with no U.S. permanent establishment, claiming a Canada-U.S. treaty exemption from federal income tax, automatically exempt from Georgia corporate income tax?

Plain-English summary

A corporation incorporated in Canada solicits sales to U.S. customers (through sales agents of a related company) and therefore has a U.S. federal return-filing requirement. It says it has no permanent establishment in the U.S. and, under the Canada-U.S. tax treaty, is exempt from U.S. federal income tax. Its only fixed place of business, assets, and inventory are in Canada, and it has no U.S. employees. It asked whether it is likewise exempt from Georgia income tax under the treaty.

The Department's answer: the treaty does not automatically exempt it from Georgia tax. Georgia taxes every foreign or domestic corporation that owns property, does business, or derives income in Georgia (O.C.G.A. §§ 48-7-21(a), 48-7-31(a)), and the ruling notes the request effectively concedes the company is "doing business" in Georgia. So the company must file a Georgia return and compute its Georgia taxable net income, which starts from federal "taxable income as defined in the Internal Revenue Code," adjusted by O.C.G.A. § 48-7-21(b) and then allocated and apportioned under § 48-7-31.

Whether the company has any federal taxable income is a separate question. A foreign corporation is taxed federally only on income effectively connected with a U.S. trade or business (IRC §§ 11, 882), and a treaty can exempt income "to the extent required" (Treas. Reg. § 1.894-1(a)). So if the treaty leaves the company with no effectively connected U.S. gross income, it may have no federal taxable income -- but the Department emphasized it "could still have a positive Georgia taxable net income" if Georgia requires additions under § 48-7-21(b), depending on how Georgia's allocation and apportionment rules apply. In short: file, compute, and don't assume the federal treaty exemption zeroes out Georgia.

What this means for you

Foreign corporations selling into Georgia

A treaty exemption from U.S. federal income tax is not the same as an exemption from Georgia income tax. If you are "doing business" in Georgia, expect a Georgia filing obligation, and compute Georgia taxable net income rather than assuming the treaty makes it zero. Georgia's own add-back and apportionment rules can produce Georgia tax even where federal taxable income is nil.

Accountants and tax professionals

Georgia taxable net income is built on federal taxable income (IRC §§ 61, 63, 11, 882; Treas. Reg. § 1.894-1(a) for the treaty overlay), then modified by O.C.G.A. § 48-7-21(b) additions and § 48-7-31 allocation/apportionment. The Department did not decide the company's ultimate Georgia liability -- it held that "doing business" triggers the return and computation, and expressly flagged § 48-7-21(b) additions as a path to positive Georgia taxable net income even with a treaty-based zero at the federal level. Note the request conceded doing-business status, so nexus itself was not contested.

Common questions

Q: We have no U.S. permanent establishment and a treaty exemption -- do we still have to file in Georgia?
A: Per this ruling, yes, if you are doing business in Georgia. The Department said the company must file a Georgia return and compute its Georgia taxable net income; the treaty exemption from federal tax does not remove the Georgia filing obligation.

Q: If the treaty makes our federal taxable income zero, is our Georgia tax also zero?
A: Not necessarily. The Department said a company could still have positive Georgia taxable net income because of Georgia additions under O.C.G.A. § 48-7-21(b) and how allocation and apportionment apply under § 48-7-31.

Q: Did the Department decide exactly how much Georgia tax was owed?
A: No. It ruled on the framework -- doing business means file and compute -- and did not calculate a final Georgia liability, which depends on the § 48-7-21(b) adjustments and apportionment.

Q: Can another foreign corporation rely on this ruling?
A: No. It binds the Department only as to the requesting taxpayer and its specific facts and has no precedential value for others.

Citations and references

Georgia statutes:

• O.C.G.A. § 48-7-21(a), (b) -- corporate income tax on Georgia taxable net income; Georgia additions/adjustments to federal taxable income
• O.C.G.A. § 48-7-31(a) -- tax applies to corporations doing business or deriving income in Georgia; allocation and apportionment

Federal:

• Internal Revenue Code § 11(a), (d) -- corporate income tax; foreign corporations taxed as provided in § 882
• Internal Revenue Code § 882(a)(1), (a)(2) -- foreign corporation taxed on income effectively connected with a U.S. trade or business
• Internal Revenue Code §§ 61(a), 63(a) -- gross income and taxable income
• Treasury Regulation § 1.894-1(a) -- income exempt to the extent required by a U.S. tax treaty
• Convention between Canada and the United States with Respect to Taxes on Income and on Capital (Canada-U.S. Treaty)

Source

• Landing page: Georgia Income Tax Letter Rulings
• Original PDF: LR IT-2018-01

Original ruling text

Georgia Letter Ruling: LR IT-2018-01
Topic:
Permanent Establishment
Date Issued:
June 20, 2018
This letter is in response to your letter requesting a ruling to determine the position taken by Company
regarding its position on the Convention between Canada and the United States of America with Respect
to Taxes on Income and on Capital (“Canada-U.S. Treaty”) and its applicability to income taxes in the state
of Georgia.
Facts as Presented by the Taxpayer
Company was incorporated in the country of Canada. Company is carrying on a trade
or business within the United States through the continuous solicitation of sales to U.S. customers. As a
result, they have a U.S. federal tax return filing requirement under U.S. domestic law. The company does
not have a permanent establishment in the U.S. and by virtue of the Canada-U.S. treaty is exempt from
paying U.S. federal income tax.
Company only has a fixed place of business in Canada and all fixed assets and inventory owned by the
taxpayer are located in Canada. The taxpayer also does not have any employees in the United States. The
only activity conducted by Company in the United States is the solicitation of sales through sales agents of
a related company.
Issue
Is Company exempt from income taxes in the state of Georgia subject to the Convention between Canada
and the United States of America with Respect to Taxes on Income and on Capital (“Canada-U.S. Treaty”)?
Legal Authorities
O.C.G.A. § 48-7-21(a) provides that:
Every domestic corporation and every foreign corporation shall pay annually an income tax
equivalent to 6 percent of its Georgia taxable net income. Georgia taxable net income of a
corporation shall be the corporation's taxable income from property owned or from business done
in this state. A corporation's taxable income from property owned or from business done in this
state shall consist of the corporation's taxable income as defined in the Internal Revenue Code of
1986, with the adjustments provided for in subsection (b) of this Code section and allocated and
apportioned as provided in Code Section 48-7-31.
O.C.G.A. § 48-7-31(a) provides that:
The tax imposed by this chapter shall apply to the entire net income, as defined in this article,
received by every foreign or domestic corporation owning property within this state, doing business
within this state, or deriving income from sources within this state to the extent permitted by the
United States Constitution. A corporation shall be deemed to be doing business within this state if
it engages within this state in any activities or transactions for the purpose of financial profit or
gain whether or not:
(1) The corporation qualifies to do business in this state;
(2) The corporation maintains an office or place of doing business within this state; or
(3) Any such activity or transaction is connected with interstate or foreign commerce.

LR IT-2018-01
Permanent Establishment
June 20, 2018
Page 2 of 2
Ruling
Foreign corporations owning property, doing business, or deriving income from sources in Georgia are
required to pay six percent tax on their “Georgia taxable net income.” O.C.G.A. §§ 48-7-21(a), -31(a). It
appears your ruling request concedes that Company is “doing business” in Georgia and hence is subject to
taxation in Georgia. As such, Company must file a return and compute its Georgia taxable net income.
“Georgia taxable net income of a corporation . . . shall consist of the corporation’s taxable income as defined
in the Internal Revenue Code of 1986, with the adjustments provided for in subsection (b) of Code Section
48-7-21 and allocated and apportioned as provided in Code Section 48-7-31.”
Whether Company has any “taxable income as defined in the Internal Revenue Code” is another matter.
Under the Internal Revenue Code, “[a] tax is . . . imposed for each taxable year on the taxable income of
every corporation.” I.R.C. § 11(a). See generally I.R.C. § 63(a) (“[F]or purposes of this subtitle, the term
‘taxable income’ means gross income minus the deductions allowed by this chapter[.]”); I.R.C. § 61(a)
(“Except as otherwise provided in this subtitle, gross income means all income from whatever source
derived”). In the case of foreign corporations, the tax imposed by I.R.C. § 11(a) applies only as provided
by I.R.C. § 882. I.R.C. § 11(d). “A foreign corporation engaged in trade or business within the United
States . . . shall be taxable as provided in section 11 . . . on its taxable income which is effectively connected
with the conduct of a trade or business within the United States.” I.R.C. § 882(a)(1). See also I.R.C. §
882(a)(2) (“In determining taxable income for purposes of paragraph (1), gross income includes only gross
income which is effectively connected with the conduct of a trade or business within the United States”).
At the same time, with exceptions not applicable here, “[i]ncome of any kind is not included in gross income
and is exempt from tax under Subtitle A (relating to income taxes), to the extent required by any income
tax convention to which the United States is a party.” Treas. Reg. § 1.894-1(a). By virtue of the Treaty, if
Company had no gross income effectively connected with the conduct of a trade or business in the United
States, then it would have no “taxable income” for purposes of I.R.C. § 11(a). But Company could still
have a positive Georgia taxable net income if there are any additions to federal taxable income required by
O.C.G.A. § 48-7-21(b), depending on how the allocation and apportionment provisions of O.C.G.A. § 487-31 apply.
The opinions expressed in this ruling are based upon the information contained in your request and limited
to the specific transactions, facts, circumstances and taxpayer in question. The facts herein are those
presented by the taxpayer and the Department accepts them as true for this ruling. If the facts presented
herein change, are not true, are different, or material facts have been omitted, the conclusions reached in
this ruling may change. In addition, subsequent statutory or administrative rule changes or judicial
interpretations of the statutes or rules upon which this advice is based may subject similar future transactions
to a different tax treatment than that expressed in this ruling.