Does a foreign corporation that only holds title to - or only holds a lien on - Texas real property have Texas franchise tax nexus?

Plain-English summary

A person asked the Comptroller (and the Secretary of State) about a foreign corporation that owns an interest in Texas real property but otherwise does no business, earns no income, and has no employees or presence. The Comptroller answered the two franchise tax questions (referring the Business Corporation Act questions to the Secretary of State). The answer turns on whether the corporation holds title or merely a lien.

• The rule. Every corporation doing business in Texas or chartered here is subject to the franchise tax (Tax Code Section 171.001(a)(1)). Rule 3.546(a)(5) provides that holding, acquiring, leasing, or disposing of any property located in Texas is doing business; and Rule 3.554(d)(20) provides that conducting any such doing-business activity that is not protected by Public Law 86-272 subjects the corporation to the earned surplus component too.
• Holding title → nexus. An out-of-state corporation that holds title to a piece of Texas property is doing business and is subject to both components of the franchise tax.
• Holding only a lien → no nexus (by itself). If the corporation's only Texas activity is holding a lien on Texas property, it is not doing business and is not subject to the tax.
• But lien activity can create nexus. If the corporation (or anyone acting on its behalf) takes any collection action in Texas in connection with the lien, it has sufficient nexus and is liable. Likewise, if the corporation forecloses on loans related to the lien and thereby obtains title to Texas property, it becomes subject to the tax under the nexus rules.

Currency note: This applies the pre-2008 franchise tax and its nexus rules, replaced by the current margin tax (House Bills 3 and 3928) effective January 1, 2008. Treat as historical.

What this means for you

Out-of-state owners of Texas real estate

Simply holding title to Texas property - even a passive, income-less holding - was "doing business" and pulled the corporation into the franchise tax (both components). There was no "we do nothing else here" escape for a titleholder.

Out-of-state lenders and lienholders

A bare lien was different: holding a security interest in Texas property, without more, was not doing business. But the safe harbor was fragile - collecting on the lien in Texas, or foreclosing into title, flipped the corporation into taxable nexus.

Accountants and tax professionals

Distinguish title from lien at the threshold, then watch the lienholder's conduct: any Texas collection activity or a foreclosure that vests title establishes nexus under Rules 3.546(a)(5) and 3.554(d)(20). This is separate from Texas property tax, which the letter did not address.

Common questions

Q: My out-of-state corporation just holds title to Texas land and does nothing else - is it subject to franchise tax?
A: Yes. Holding title to Texas property is doing business, so it is subject to both components of the franchise tax.

Q: What if it only holds a lien on Texas property?
A: Then it is not doing business and not subject to the tax - unless it takes collection action in Texas or forecloses into title.

Q: Does foreclosing change the answer?
A: Yes. If the corporation forecloses and obtains title to Texas property, it becomes subject to the tax.

Citations and references

Statutes, rules, and authorities:

• Tex. Tax Code Sec. 171.001(a)(1) (corporations doing business in or chartered in Texas are subject to the franchise tax)
• 34 Tex. Admin. Code Sec. 3.546(a)(5) (holding, acquiring, leasing, or disposing of Texas property is doing business)
• 34 Tex. Admin. Code Sec. 3.554(d)(20) (unprotected doing-business activity subjects the corporation to the earned surplus component)
• Public Law 86-272 (federal limit on state taxation of certain interstate solicitation)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200302742L

Original ruling text

February 11, 2003

To: ** [mailto: ]

Dear **;

Thank you for your inquiry concerning a foreign corporation that owns property
in Texas. I'll address questions 1 and 3 concerning the Texas franchise tax.
You indicated that you also sent the inquiry to the Texas Secretary of State.
I'll refer Questions 2 and 4 concerning the Texas Business Corporation Act to
that office.

Each corporation that does business in Texas or that is chartered in this state
is subject to the Texas franchise tax. See Texas Tax Code Sec. 171.001(a)(1).

Comptroller's Franchise Tax Rules Section 3.546 and Section 3.554 address the
franchise tax nexus standards for out-of-state corporations. Franchise Tax
Rule Section 3.546(a)(5) is directed at real estate activities and provides
that holding, acquiring, leasing, or disposing of any property located in Texas
constitutes doing business. Franchise Tax Rule Section 3.554(d)(20) provides
that conducting any activity listed as doing business in Franchise Tax Rule
Section 3.546 (relating to taxable capital nexus), which is not protected by
Public Law 86-272, will subject the corporation to the earned surplus component
of the tax.

Based on the above referenced statutory cite and these rules, an out-of-state
corporation that holds title to a piece of property in Texas will be subject to
both components of the franchise tax.

If the corporation's only activity in Texas is the holding of a lien on a piece
of property in Texas, then it would not be doing business for franchise tax
purposes and would not be subject to the tax. However, if the corporation or
any representatives acting on its behalf attempt to take any collection action
in Texas in connection with this lien, the corporation would have sufficient
nexus to be liable for the tax. Also, if the corporation forecloses on any
loans related to the lien so that the corporation obtains title to property in
Texas, it would be subject to the tax under the nexus rules.

The statute and rules that are cited above, as well as additional information
regarding the franchise tax rules, statutes, forms, instructions, and other
related materials, are available online at
.

This response is based on the facts presented and current law. If there are
different or additional facts, the response may change.

If you need any information or have any questions my internet address is
, or you may call me at 1-800-531-5441,
extension 54653.

Our goal is to provide you with prompt, professional service. Please take a
moment to complete our on-line survey at:
http://aixtcp.cpa.state.tx.us/surveys/tpsurv/

Sincerely,

Joseph Mancuso
Tax Policy Division

Dear Sirs,

After calling your offices and receiving conflicting information, I am sending
this email in the hope of getting a definitive answer to my question regarding
the ownership of property within Texas and the taxation of the ownership. I am
sending this question to both the Secretary of State and the Comptrollers
office, I would greatly appreciate your help in researching this matter.

Question 1: If an entity which is incorporated outside the state of Texas,
which does no business, collects no income, pays no employees, it just holds
title to a piece of property within the state of Texas, with no encumbrances.

Is that foreign entity considered to be doing business within the state and
therefore be liable for all reporting and taxes (not relating to property
taxes, but the franchise tax or any other taxes to the entity) which may be
levied upon it?

Question 2: If so, what part of the Texas business act does this come under?

Question 3: If a entity which is incorporated outside the state of Texas, which
does no business, collects no income, pays no employees, and has no presence it
just holds a lien on a piece of property within the state of Texas Is that
foreign entity considered to be doing business within the state and therefore
be liable for all reporting and taxes (not relating to property taxes, but the
franchise tax or any other taxes to the entity) which may be levied upon it?

Question 4: If so, what part of the Texas business act does this come under?

Thank you,