Is a New York investment-advisory subsidiary of a foreign 'bank' that is principally engaged in investment management (not deposits/lending) taxable under Article 32 as a banking corporation, or under Article 9-A?
Plain-English summary
Clariden Asset Management (New York) Inc. is a New York investment-advisory company, wholly owned through a chain of Swiss holding companies under Clariden Bank, a Swiss corporation that holds a Swiss banking license but is principally engaged in investment management and advisory services for high-net-worth clients (not traditional deposit-taking and lending). Clariden NY asked whether it is taxable under Article 32 (the bank franchise tax) or Article 9-A (the general business corporation tax). Under section 209.4, a corporation taxable under Article 32 is not taxable under Article 9-A.
Article 9-A. A corporation can be a "banking corporation" under section 1452(a)(9) only if it is 65%-owned by a parent that is itself a banking corporation. Clariden NY's intermediate Swiss holding companies are not banking corporations, so it qualifies only if Clariden Bank is a banking corporation. But under section 1452(b) and Banking Law section 96, "doing a banking business" means being principally engaged in the core activities of a bank or trust company -- discounting notes, lending, taking deposits, and the like. Relying on Phillips v Investors' Syndicate (performing an incidental bank-permitted activity is not the same as doing a banking business) and NYS Assn of Life Underwriters, the Department held that because Clariden Bank is principally an investment manager/advisor, not principally engaged in core banking, it is not doing a banking business and is not a banking corporation. So Clariden NY is not a banking corporation under 1452(a)(9) and is taxable under Article 9-A.
What this means for you
A "bank" label is not enough -- core activity controls
Whether a corporation is a banking corporation turns on whether it is principally engaged in the core banking activities (deposits, lending, discounting) -- not on holding a banking license or performing some bank-permitted services.
Incidental banking-type acts do not make a banking business
Activities that a bank may perform as incidental powers (investment counseling, buying/selling securities for customers) do not, by themselves, make a company a banking corporation if they are merely incidental to a non-banking principal business.
The 65%-owned-subsidiary test depends on the parent
A subsidiary is swept into Article 32 under section 1452(a)(9) only if its qualifying parent is itself a banking corporation. If the parent is not doing a banking business, the subsidiary is taxable under Article 9-A.
Common questions
Q: Does a Swiss banking license make the company an Article 32 banking corporation?
A: No. New York looks at whether the company is principally engaged in core banking activities, not foreign license status.
Q: Clariden does some lending and securities work -- isn't that banking?
A: Those are incidental powers. The company must be principally engaged in core banking to be doing a banking business.
Q: So which tax applies to the New York subsidiary?
A: Article 9-A. Because the parent is not a banking corporation, the subsidiary is not one either, and section 209.4 does not push it into Article 32.
Citations and references
Statutes, regulations, and authorities:
- Tax Law section 209.4 (a corporation taxable under Article 32 is not taxable under Article 9-A)
- Tax Law section 1451 (franchise tax on banking corporations)
- Tax Law section 1452(a)(1), (2), (9) (banking corporation, including 65%-owned subsidiary of a banking corporation)
- Tax Law section 1452(b) (doing a banking business; reference to Banking Law articles)
- Banking Law section 96 (core powers of a bank or trust company)
- Phillips v Investors' Syndicate, 145 Misc 361 (incidental act is not doing a banking business); NYS Assn of Life Underwriters v NYS Banking Dept, 83 NY2d 353
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1995.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a95_20c.pdf
Original ruling text
New York State Department of Taxation and Finance
Taxpayer Services Division
Technical Services Bureau
TSB-A-95 (20) C
Corporation Tax
December 13, 1995
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. C950627B
On June 27, 1995, a Petition for Advisory Opinion was received from Clariden Asset
Management (New York) Inc., 540 Madison Avenue, New York, New York 10022.
The issue raised by Petitioner, Clariden Asset Management (New York) Inc., is whether
Petitioner is taxable under Article 9-A or Article 32 of the Tax Law.
Petitioner is a wholly-owned subsidiary of Clariden Bank, a Swiss corporation. The stock of
Clariden Bank is owned by Leu Holding Ltd., a Swiss holding company. Leu Holding Ltd. is, in
turn, owned 100 percent by CS Holding, another Swiss holding company. The activities of each
entity in Petitioner's ownership chain are described below.
CS Holding is a Swiss corporation which owns the stock of several corporations, including
Leu Holding Ltd. CS Holding does not do business in the United States and is not a bank holding
company as defined in section 1462(f)(1) of the Tax Law and section 16-2.4 of the Franchise Tax
on Banking Corporations Regulations ("Article 32 "Regulations"). Like CS Holding, Leu Holding
Ltd. is a Swiss holding company. Leu Holding Ltd. does not conduct business in the United States
and is not a bank holding company as defined in section 1462(f)(1) of the Tax Law and section 16
2.4 of the Article 32 Regulations. Leu Holding Ltd. owns 100 percent of the stock of Clariden Bank.
For purposes of section 1462(f)(1) of the Tax Law and section 16-2.4 of the Article 32
Regulations, the term "bank holding company" means any corporation subject to Article 3-A of the
Banking Law, or registered under the Federal Bank Holding Company Act of 1956, as amended, or
registered as a savings and loan holding company (but excluding a diversified savings and loan
holding company) under the Federal National Housing Act, as amended.
Clariden Bank, Petitioner's direct parent corporation, is a Swiss corporation. It is not
a bank holding company as defined in section 1462(f)(1) of the Tax Law and section 16-2.4
of the Article 32 Regulations. Clariden's principal business activity is to provide
personalized investment management and advisory services to select, high net worth clientele
located throughout the world. In providing quality services to clients, Clariden's advisors
develop a comprehensive financial profile of each client prior to investing his assets. This profile
enables the advisor to fully understand the client's circumstances, financial goals and attitudes
towards investment and risk. The advisor then determines the appropriate portfolio structure for the
client. Depending on the type of services requested, Clariden provides its clients with (i) portfolio
and asset management where the Clariden investment advisor is authorized to make all investments
at his own discretion within Clariden's policy; (ii) investment advice whereby the client
TP-9(9/88)
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Corporation Tax
December 13, 1995
itself authorizes investments; and/or (iii) execution services to secure punctual and reliable execution
of client orders at the best possible price, and custodial services for securities. In 1993, these
services generated more than 50% of Clariden's total income. The remainder of Clariden's income
for 1993 was derived from interest, income from bills and money market instruments, foreign
exchange and precious metals dealing, income and gains on securities and other miscellaneous
income.
Clariden also offers several investment products to its clients, including proprietary mutual
funds, money market instruments, bonds, equities, foreign exchange and derivatives (i.e., futures,
options). These products are offered to provide clients with broad-based investment options which
complement Clariden's management and advisory services. Like many other private banks, Clariden
also provides clients with collateral credit. For the most part, collateral credit is offered to provide
clients with funds for short-term bridging purposes, medium-term financing of private or commercial
commitments, or to leverage existing investments. The most common type of credit extended to
clients is made as an overdraft on the client's current account (i.e., lending on margin). This type of
collateral credit is generally granted where the client's need for funds are relatively small or
temporary in nature. In some cases, Clariden also offers clients fixed term loans or letters of credit
secured by the clients' investment portfolios. Finally, clients can also enter into forward foreign
exchange/precious metals contracts and buy or sell options for investment or hedging purposes
through the use of collateral credit.
In addition to investment and advisory services, Clariden also invests in a variety of securities
for its own account. In 1993, Clariden derived approximately 13 percent of its total income from
such investments. Moreover, approximately 18 percent of its total assets consisted of securities in
1993.
Although Clariden is not principally engaged in traditional banking activities (i.e., accepting
deposits, making loans), under Swiss law it is required to hold a banking license. Swiss banking
licenses are issued to commercial banks as well as to entities involved in investment activities, either
exclusively or partially. Under Swiss law, corporations holding a Swiss banking license may
conduct banking or investment activities. However, such corporations are not required to conduct
both activities.
Petitioner, a New York corporation, is registered with the U.S. Securities and Exchange
Commission as an investment advisor. Like Clariden Bank, Petitioner provides international
investment advice and portfolio management services to U.S. and foreign individuals and
institutions. In conducting its activities, Petitioner emphasizes global investing to maximize its
clients' returns on their investments. Petitioner also manages two foreign investment funds
established by its parent corporation. In 1993, Petitioner derived approximately 100 percent of its
total income from the foregoing services.
Section 209.1 of Article 9-A of the Tax Law imposes an annual franchise tax on
a domestic or foreign corporation for the privilege of exercising its corporate franchise,
doing business, employing capital, owning or leasing property in a corporate or organized
capacity, or maintaining an office, in New York State during the taxable year.
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Section 209.4 of the Tax Law, provides that a corporation liable to tax under Article 32 of the Tax
Law is not subject to tax under Article 9-A of the Tax Law.
Section 1451 of Article 32 of the Tax Law imposes an annual franchise tax on every banking
corporation for the privilege of exercising its franchise or doing business in New York State in a
corporate or organized capacity during the taxable year.
Section 1452(a) of the Tax Law defines "banking corporation" for purposes of Article 32 of
the Tax Law. Section 1452(a)(1) of the Tax Law provides that "[e]very corporation or association
organized under the laws of [New York State] which is authorized to do a banking business, or
which is doing a banking business" is a banking corporation. Section 1452(a)(2) of the Tax Law
provides that "every corporation or association organized under the laws of any other state or country
which is doing a banking business" is a banking corporation.
Section 1452(a)(9) of the Tax Law provides that any corporation 65 percent or more of whose
voting stock is owned or controlled, directly or indirectly, by a corporation or corporations subject
to Article 3-A of the Banking Law, or registered under the Federal Bank Holding Company Act of
1956, as amended, or registered as a savings and loan holding company (but excluding a diversified
savings and loan holding company) under the Federal National Housing Act, as amended, or by a
corporation or corporation described in section 1452(a)(1) through (8) of the Tax Law, is a banking
corporation provided that the corporation whose voting stock is so owned or controlled is principally
engaged in a business, regardless of where conducted, which (i) might be lawfully conducted by a
corporation subject to Article 3 of the Banking Law or by a national banking association or (ii) is so
closely related to banking or managing or controlling banks as to be a proper incident thereto, as set
forth in section 4(c)(8) of the Federal Bank Holding Company Act of 1956, as amended.
Section 1452(b) of the Tax Law provides that the words "banking business" as used in
section 1452 mean, in part, "such business as a corporation or association may be created to do under
article three, three-B, five, five-A, five-C, six, or ten of the banking law or any business which a
corporation or association is authorized by such article to do... also ...such business as any
corporation or association organized under the ... law of any other ... country has authority to do
which is substantially similar to the business which a corporation or association may be created to
do under article three, three-B, five, five-A, five-C, six or ten of the banking law or any business
which a corporation or association is authorized by such article to do."
Herein, CS Holding and Leu Holding Ltd. are not corporations subject to Article 3-A of the
Banking Law, and are not registered under the Federal Bank Holding Company Act or under the
Federal National Housing Act. Therefore, Petitioner may be a banking corporation pursuant to
section 1452(a)(9) of the Tax Law only if Clariden Bank is a banking corporation pursuant to section
1452(a) of the Tax Law.
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There is a distinction between doing a banking business and the performance of isolated acts
of which the business consists. Carrying on a banking business does not mean the performance of
a single disconnected banking business act. "[I]t is only when the execution of such banking-like
engagements become a principal activity of a business corporation, as contrasted with being a mere
incident of the conduct of its principal enterprise, that the business corporation becomes engaged in
banking." (Phillips v Investors' Syndicate, (1932) 145 Misc 361; also, see 9 NY JUR 2d 31 Banks.)
In the Matter of New York State Association of Life Underwriters Inc. v New York State
Banking Department, (1994) 83 NY2d 353, the Court of Appeals stated that while it "has not
sanctioned every activity engaged in by banks as an incidental power necessary to carry on the
business of banking, commercial banks in [New York State] now engage in such activities as selling
certificates of deposit, buying and selling securities on behalf of customers, establishing individual
retirement accounts, and providing financial planning and investment counseling services."
Under section 96 of Article 3 of the Banking Law, the core activities of a bank or trust
company are: to discount, purchase and negotiate promissory notes, drafts, bills of exchange, other
evidences of debt, and obligations in writing to pay in installments or otherwise all or part of the
price of personal property or that of the performance of services; purchase accounts receivable,
whether or not they are obligations in writing; lend money on real or personal security; borrow
money and secure such borrowings by pledging assets; buy and sell exchange, coin and bullion; and
receive deposits of moneys, securities or other personal property upon such terms as the bank or trust
company shall prescribe. Such bank or trust company shall also exercise all such incidental powers
as shall be necessary to carry on the business of banking.
Herein, Clariden Bank's principal business activity is to provide personalized investment
management and advisory services to its clients by providing portfolio and asset management,
investment advice and/or execution services. In Underwriters, supra, such activities are permitted
by a bank or trust company under Article 3 of the Banking Law as incidental powers necessary to
carry on the business of banking under section 96 of the Banking Law. However, in Phillips, supra,
the distinction was made that the conduct of an activity that is an incidental power necessary to carry
on the business of banking does not mean that such activity constitutes a banking business.
Accordingly, for a corporation to be engaged in banking, it must be principally engaged in the core
activities that make a corporation subject to the Banking Law. Herein, Clariden Bank is not
principally engaged in activities, that if conducted in New York State would make Clariden Bank
an entity that would be subject to Article 3, 3-A, 5, 5-A, 5-C, 6 or 10 of the Banking Law.
Therefore, Clariden Bank is not a corporation or association which is doing a banking business
pursuant to section 1452(b) of the Tax Law.
Since Clariden Bank is not doing a banking business, it is not a banking corporation pursuant
to section 1452(a)(2) of the Tax Law and Petitioner is not a banking corporation pursuant to section
1452(a)(9) of the Tax Law. Petitioner is organized in New York State, but is not created or
authorized to do business under Articles 3, 3-B, 5, 5-A, 5-C, 6 or 10 of the Banking Law. Therefore,
Petitioner is not doing a banking business pursuant to section 1452(b) of the Tax
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Corporation Tax
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Law and Petitioner is not a banking corporation pursuant to section 1452(a)(1) of the Tax Law.
Accordingly, Petitioner is not subject to tax under Article 32 of the Tax Law. Petitioner is subject
to tax under Article 9-A of the Tax Law.
DATED: December 13, 1995
NOTE:
s/DORIS S. BAUMAN
Director
Technical Services Bureau
The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.