Would two directly owned and one indirectly owned Rhode Island subsidiaries each qualify as a passive investment company exempt from business corporation tax if they shared the required employees and limited their in-state activities?

Plain-English summary

Each of the three proposed subsidiaries qualified as a passive investment company exempt from Rhode Island business corporation tax. The commonly owned group would collectively employ at least five full-time-equivalent employees in Rhode Island, maintain a Rhode Island office, and limit its in-state work to qualifying investment-management activities.

Company X proposed two wholly owned direct subsidiaries and a third subsidiary owned through Company Y. The three companies were separated to meet different collateral requirements, improve liability protection, and manage intangible-investment operations more efficiently.

The Rhode Island employees would develop analytical tools, recommend asset-and-liability investment strategies, build interest-rate risk models, and process portfolio and collateral-assignment transactions. The companies would not conduct securities activities requiring broker or dealer registration.

The statutory exclusion required the corporations and all corporations under direct or indirect common ownership to employ at least five Rhode Island FTEs, maintain an office in the state, and confine Rhode Island activities to maintaining and managing qualifying intangible investments and collecting or distributing income from those investments or from tangible property outside Rhode Island.

The Division found the proposed structure and activities satisfied those conditions. Although the staffing threshold was met collectively across the commonly owned group, each of the three corporations qualified individually for exclusion from the business corporation tax.

What this means for you

Passive investment company groups

The employee threshold could be satisfied across corporations under direct or indirect common ownership on these facts. Each entity still had to fit the statutory activity limits.

Investment and treasury teams

Keep Rhode Island functions focused on maintaining and managing intangible investments and collecting or distributing the related income. Activities outside that scope may not match the ruling.

Corporate structuring teams

Direct ownership was not required for every subsidiary. The order covered two direct subsidiaries and one indirectly owned subsidiary within the same commonly owned group.

Common questions

Did each subsidiary need five employees of its own? No. The three commonly owned companies collectively employed at least five Rhode Island FTEs.

Did they need a Rhode Island office? Yes. The proposed companies would maintain an office location in Rhode Island.

What activities could they perform in Rhode Island? Maintenance and management of qualifying intangible investments and collection or distribution of related income, including the investment-analysis and portfolio functions described in the ruling.

Could one subsidiary be indirectly owned? Yes. The ruling covered one subsidiary owned through another direct subsidiary of Company X.

What was the tax result? Each company was excluded from the business corporation tax under R.I. Gen. Laws § 44-11-1(1)(vii).

Citations and references

• R.I. Gen. Laws § 44-11-1(1)(vii) — passive investment company requirements and corporation-tax exclusion.
• 15 U.S.C. § 80a-1 et seq. — Investment Company Act of 1940 reference within the permitted-activities provision.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 2004-02

Original ruling text

Ruling Request No. 2004-02

Ruling Request No. 2004-02

Request for Ruling Regarding the Qualification of Certain Corporations as Passive Investment Companies

On behalf of your client, Company X, you request a declaratory ruling tow (2) wholly-owned direct and one (1) indirect corporations which will collectively employ more than five (5) full-time equivalent Rhode Island employees and have a Rhode Island based location each will qualify as a Passive Investment Company and will each be exempt from the business corporation tax pursuant to R.I.G.L. 44-11-1(1)(vii). This request is made pursuant to the provisions of Section 42-35-8, R.I.G.L., 1956 (as amended) as well as Regulation DR 94-01 of the Rhode Island Division of Taxation.

Facts

The facts set forth in your request for ruling dated May 4, 2004, and the documents submitted are incorporated herein by reference. Such facts and documents for the basis for this ruing.

Company X proposes to establish three (3) passive investment company subsidiaries ("the PICs" or individually, a "PIC"). Two of these PICs will be wholly owned directly by Company X; a third PIC will be wholly owned by "Company Y", which will be created as a direct subsidiary of Company X and which intends to qualify as a Massachusetts based security corporation pursuant to Massachusetts General Laws, Chapter 63, §39B(a).

The PICs will maintain an office location in Rhode Island and will collectively employ five (5) or more full time equivalent employees as required by the enabling statute. Company X is in the process of finding a suitable location in Rhode Island for itself and the three PICs. Company X proposes to establish three (3) PICs rather than a single PIC in order to satisfy the separate collateral requirements of the Federal Home Loan Bank, the Federal Reserve Bank of Boston, and Company X's own borrowing needs. The separate PICs will provide more effective liability protection and more efficient management of intangible investment operations and collateral requirements.

The PIC employees will confine their activities to the maintenance and management of the intangible investments of the PICs as separate and distinct entities. More specifically, the PIC employees will conduct the following activities related to the maintenance and management of PIC intangible investments: develop third party analytical(sic) tools, develop and recommend specific asset and liability investment strategies, develop interest rate risk simulation models, process the day-to-day transactions for portfolio and collateral assignment for repurchase agreements and other related activities and functions. The PICs will not engage in securities activities requiring them to register as a broker or dealer under state or federal law.

Ruling Requested

The two (2) wholly-owned direct and one (1) indirect corporations which propose to conduct activities as herein set forth and which will collectively employ more than five (5) full-time equivalent Rhode Island employees and have a Rhode Island based location each will qualify as a Passive Investment Company and will each be exempt from the business corporation tax pursuant to R.I.G.L. section 44-11-1(1)(vii).

Discussion

Section 44-11-1 R.I.G.L. provides in pertinent part as follows:

> . . . Corporation means every corporation . . . except . . .
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>> (vii)(A) Corporations which together with all corporations under direct or indirect common ownership that satisfies the other requirements of this paragraph employ not less than five (5) full-time equivalent employees in the state;
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>
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> (B) which maintain an office in the state; and
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>
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> (C) activities of which within the state are confined to the maintenance and management of their intangible investments or of the intangible investments of corporations or business trusts registered as investment companies under the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq., and the collection and distribution of the income from those investments or from tangible property physically located outside the state. For purposes of this paragraph, "intangible investments" includes, without limitation, investments in stocks, bonds, notes, and other debt obligations, including debt obligations of affiliated corporations, patents, patent applications, trademarks, trade names, copyrights, and similar types of intangible assets.

The facts presented disclose that the PICs that Company X proposes to establish will operate in conformity with R.I.G.L. 44-11-1(1)(vii). They will maintain an office location in Rhode Island; collectively employ five (5) or more full-time equivalent employees; and confine their activities in Rhode Island to the maintenance and management of their intangible investments or of the intangible investments of corporations or business trusts registered as investment companies under the Investment Company Act of 1940 and to the collection and distribution of the income from such investments or from tangible property located outside Rhode Island.

Ruling

The two (2) wholly-owned direct and one (1) indirect corporations which propose to conduct activities as herein set forth and which will collectively employ more than five (5) full-time equivalent Rhode Island employees and have a Rhode Island-based location each will qualify as a Passive Investment Company and will each be exempt from the business corporation tax pursuant to R.I.G.L. § 44-11-1(1)(vii).

This ruling may be relied upon by Company X and shall be valid unless expressly revoked or until the applicable statutory provisions of law are amended in a manner that requires a different result or the underlying facts described herein change.

**R. GARY CLARK

TAX ADMINISTRATOR

MARCH 18, 2004**