New York Advisory Opinion TSB-A-15(5)C: If an alien (Swiss) holding company's disregarded Delaware LLC opens a New York office but only invests in securities for its own account, is the company subject to New York's Article 9-A franchise tax?

Plain-English summary

A Swiss holding company (an "alien" corporation, meaning a corporation organized outside the United States) was the sole member of a Delaware LLC that is treated as a disregarded entity. The LLC was an investment company that did nothing but invest in securities, private-equity funds and hedge funds for its own account. It planned to move its office from New Jersey to New York and asked whether that would expose the parent to New York's corporate franchise tax under Article 9-A.

The Department said no. Tax Law § 209(2-a) provides that an alien corporation is not treated as doing business, employing capital, owning property or maintaining an office in New York if its New York activity is limited solely to investing or trading in stocks, securities or commodities for its own account within the meaning of IRC § 864(b)(2). Because the LLC's activity fit squarely in that safe harbor, and because the alien parent had no income "effectively connected" with a U.S. trade or business under IRC § 882 and Tax Law § 208(9)(iv), the parent would not be subject to the Article 9-A franchise tax merely because the office sits in New York.

The Department added a caveat: even though corporate tax reform (Part A of Chapter 59 of the Laws of 2014) repealed the old annual filing requirement for alien corporations, the Department can still require the corporation to produce books and records under Tax Law § 1096(b) to substantiate that its activity stays inside the § 864(b)(2) safe harbor.

What this means for you

Foreign investment funds and holding companies

Opening or relocating a back-office to New York does not, by itself, create franchise-tax nexus for an alien corporation that only trades securities for its own account. The protection depends entirely on staying inside the IRC § 864(b)(2) "trading for its own account" safe harbor — trading for customers, dealing, or running an active U.S. business breaks it.

Accountants and tax professionals

The disregarded LLC's activity is attributed to its alien member, so the analysis runs through the member. Watch two independent tests: the § 209(2-a) "investing/trading for own account" carve-out, and the § 208(9)(iv)/IRC § 882 "no effectively connected income" condition. Keep contemporaneous records; the repeal of the annual filing requirement did not repeal the Department's right to demand substantiation.

Common questions

Q: Does having a New York office automatically create franchise-tax nexus?
A: Not for an alien corporation whose only New York activity is investing or trading securities for its own account within IRC § 864(b)(2). The office alone does not defeat the safe harbor.

Q: Do we still have to file anything?
A: Corporate tax reform repealed the old annual filing requirement for alien corporations, but the Department can require books and records to confirm the activity stays inside the safe harbor.

Q: Can my fund rely on this opinion?
A: No. An Advisory Opinion binds the Department only as to the petitioner and the exact facts presented. It shows the Department's reasoning, but your facts may differ.

Citations and references

• Tax Law § 209(2-a) (alien corporation investing/trading for its own account not "doing business")
• Tax Law § 208(9)(iv) (entire net income tied to effectively connected income)
• IRC § 864(b)(2) (trading in securities for one's own account safe harbor)
• IRC § 882 (income effectively connected with a U.S. trade or business); IRC § 7701 ("domestic corporation")
• Tax Law § 1096(b) (Department's authority to require substantiation)
• Part A of Chapter 59 of the Laws of 2014 (corporate tax reform; repeal of alien-corporation annual filing requirement)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2015.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a15_5c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-15(5)C
Corporation Tax
July 10, 2015

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C141117A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
REDACTEDREDACTEDREDACTEDREDACTED (Petitioner). Petitioner asks whether it will be
subject to New York franchise tax pursuant to Article 9-A of the Tax Law if the limited liability company
of which Petitioner is the sole member relocates its business office to New York City from out-of-state.
Petitioner further asks, if it is not subject to the franchise tax, what documentation it may be required to
submit to substantiate this.
We conclude that, if the limited liability company of which Petitioner is the sole member opens an
office in New York, and provided that its activities continue to come within the meaning of Internal
Revenue Code (“IRC”) § 864(b)(2), as described herein, then Petitioner will not be subject to the
franchise tax imposed under Tax Law Article 9-A. We further conclude that Petitioner may be required to
provide any documentation necessary to substantiate that it is not subject to the franchise tax.

Facts
Petitioner, an alien corporation, is a Swiss holding company and the sole member of a Delaware
limited liability company (the “LLC”) that is treated as a disregarded entity for federal and state tax
purposes. The LLC is an investment company engaged exclusively in investing in securities in various
private equity funds, hedge funds and operating-companies for its own account.
The LLC currently has an office in New Jersey and has never owned or leased any real property in
New York.
Petitioner is not otherwise engaged in the conduct of a U.S. trade or business, either directly or
through any legal entity. Therefore, Petitioner does not have income effectively connected with the
conduct of a U.S. trade or business as determined under IRC § 882.

Analysis
Tax Law § 209(2-a) provides that an alien corporation is not deemed to be doing business,
employing capital, owning or leasing property, maintaining an office, or deriving receipts from activity in
New York if its activities in the state are limited solely to investing or trading in either stocks and
securities or commodities, or any combination of these, for its own account within the meaning of IRC §
864(b)(2).
Section 209(2-a) also provides that an alien corporation that, under any provision of the IRC, is
not treated as a "domestic corporation" as defined in IRC § 7701 and has no effectively connected income
for the taxable year pursuant to Tax Law § 208(9)(iv), will not be subject to tax for such taxable year.
Tax Law § 208(9)(iv) provides that the entire net income of such an alien corporation is equal to the entire

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TSB-A-15(5)C
Corporation Tax
July 10, 2015

taxable income that “is effectively connected with the conduct of a trade or business within the United
States” pursuant to IRC § 882.
Since the LLC, which is treated as a disregarded entity, is an investment company engaged
exclusively in investing in securities in various private equity funds, hedge funds and operatingcompanies for its own account, its activities in New York would be limited solely to those described in
IRC § 864(b)(2). 1 Therefore, and to the extent of such activities, Petitioner, which is the LLC’s sole
member, will not be deemed to be doing business, employing capital, owning or leasing property,
maintaining an office, or deriving receipts from activity in New York under Tax Law § 209(2-a).
Also, since Petitioner is an alien corporation and would have no effectively connected income, i.e.,
no income that is effectively connected with the conduct of a U.S. trade or business, Petitioner will not be
subject to New York’s franchise tax.
Therefore, Petitioner will not be subject to the franchise tax imposed under Tax Law Article 9-A if
the LLC opens an office in New York, provided that the LLC’s activities continue to come within the
meaning of IRC § 864(b)(2) and Petitioner has no income that is effectively connected with the conduct
of a U.S. trade or business.
Finally, Petitioner may be required to provide any documentation, without qualification, that may
be necessary to substantiate that it is not subject to the franchise tax imposed under Tax Law Article 9-A.
See Tax Law § 1096(b). Prior to tax year 2015, alien corporations were subject to an annual filing
requirement. However, pursuant to corporate tax reform (see Part A of Chapter 59 of the Laws of 2014,
as amended by Part T of Chapter 59 of the Laws of 2015), the filing requirement has been repealed.
Nevertheless, there remain instances where an alien corporation will be required to substantiate its claim
that it is not subject to tax, which may include the production of the corporation’s books and records. In
such instances, entries in the alien corporation’s books and records will be examined to determine, for
example, whether the corporation’s activities in New York are limited solely to investing or trading in
either stocks and securities or commodities, or any combination of these, for its own account within the
meaning of IRC § 864(b)(2).

DATED: July 10, 2015

NOTE:

1

/S/
DEBORAH R. LIEBMAN
Deputy Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to the facts set
forth therein and is binding on the Department only with respect to the person or entity to
whom it is issued and only if the person or entity fully and accurately describes all relevant
facts. An Advisory Opinion is based on the law, regulations, and Department policies in effect
as of the date the Opinion is issued or for the specific time period at issue in the Opinion. The
information provided in this document does not cover every situation and is not intended to
replace the law or change its meaning.

A “disregarded entity” is defined as an entity separate from its owner which nonetheless elects not to be treated, i.e., to be
disregarded, as separate from the owner of the entity for federal tax purposes. See 26 C.F.R. § 301.7701-3.