Does a Delaware holding company that only owns a Texas bank's stock and collects dividends have Texas franchise tax nexus, and are those dividends part of the Texas parent's Texas receipts?

Plain-English summary

A Texas corporation planned a holding company restructuring: it would create a new Delaware corporation that would own 100% of a Texas-domiciled national bank, giving an ownership chain of Texas parent → Delaware subsidiary → Texas bank. The Delaware company would keep a Delaware address, have no Texas employees, assets, or services, hold all meetings outside Texas, use an independent contractor for its books, and exist only to own the bank's stock and collect dividends (it might keep a checking account at the bank and hire a Texas resident as president; its officers and directors would be Texas residents who might also serve the bank, but would meet outside Texas). The taxpayer asked two questions.

• Does the Delaware company have nexus / is it "doing business" in Texas? No - based on these facts, the Delaware company is not doing business in Texas. The Comptroller cautioned that the Delaware company must be able to prove the activities it is capable of are actually carried on outside Texas.
• Are the dividends the Texas parent receives from the Delaware company included in the parent's Texas receipts? No. For that answer, the Comptroller presumed the dividend income is unitary income for the Texas parent.

This letter mirrors a companion ruling, 200311243L, issued about three months later on essentially the same facts. The main factual difference is that here the Delaware holding company would have multiple Texas-resident officers and directors (who meet outside Texas), whereas the companion described a single officer/director. The conclusions were the same.

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

What this means for you

Groups using an out-of-state holding subsidiary

A holding subsidiary that genuinely confined its activity to passively owning stock and collecting dividends from outside Texas was not "doing business" in Texas on these facts - even with Texas-resident officers, so long as they conducted the company's business outside Texas. The ruling flags the burden: the entity had to be able to demonstrate its corporate activities were actually conducted outside Texas.

The Texas parent corporation

The dividends flowing up from the Delaware subsidiary were not swept into the parent's Texas receipts, on the assumption the income was unitary. How intercompany dividend income is characterized (unitary vs. not) drives that receipts answer.

Accountants and tax professionals

Nexus turned on where activities were actually carried on, not on the Texas domicile of the underlying bank or the Texas residency of officers. Keep records showing the holding entity's board meetings, management, and operations occurred outside Texas, and confirm the unitary characterization before excluding upstream dividends from Texas receipts.

Common questions

Q: Did creating a Delaware holding company owning a Texas bank give the Delaware entity Texas nexus?
A: No, not on these facts - its only activity was owning the bank's stock and collecting dividends, with no Texas employees, assets, services, or meetings. But it had to prove those activities were carried on outside Texas.

Q: Do Texas-resident officers and directors create nexus for the holding company?
A: Not by themselves here, because they conducted the company's business outside Texas.

Q: Were the upstream dividends part of the Texas parent's Texas receipts?
A: No. The Comptroller presumed the dividend income was unitary income for the Texas parent and did not include it in Texas receipts.

Citations and references

This letter states the Comptroller's nexus and receipts conclusions on the stated facts and does not cite specific Tax Code sections or Comptroller rules in its text.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200308069L

Original ruling text

August 21, 2003

Dear **:

This letter is in response to your ruling request regarding the Texas franchise
tax consequences of a proposed holding company structure.

You have indicated **, an existing Texas corporation (Texas
Company), proposes to acquire 100 percent of the stock of a new company, a
Delaware corporation (Delaware Company). The Delaware Company would then
acquire 100 percent of the stock of ** (Bank), a national banking
association domiciled in **, Texas. Consequently, Bank will be a
subsidiary of Delaware Company, and Delaware Company will be a subsidiary of
Texas Company.

You have also indicated the following statements apply to the Delaware Company:

1. The company will maintain a Delaware address, and its only place of
   business will be outside of Texas. The sole operations will consist of owning
   Bank stock and receiving dividends from Bank.

2. The company will have no employees or assets in Texas and will perform no
   services in Texas. Additionally, all meetings of the Delaware Company will be
   held outside of Texas.

3. An independent contractor will maintain the books and records of Delaware
   Company.

4. The officers and directors of Delaware Company will be Texas residents who
   may be officers or directors of Bank. However, the officers and directors will
   meet outside of Texas to conduct company business. The company wishes to hire
   a Texas resident to serve as President.

5. The company may maintain a checking account in Bank.

Neither Texas Company nor Bank will:

1. Represent Delaware Company in any manner in Texas.
2. Charge Delaware Company for any intercorporate items.

You asked the following questions with regard to the proposed transaction:

1. Does Delaware Company have sufficient nexus to be considered doing business
   in Texas?

Response:

Based on these facts, Delaware Company is not doing business in Texas. But
Delaware Company must prove that the activities, which the corporation is
capable of, are carried on outside of Texas.

2. Are the dividends received by Texas Company from Delaware Company included
   in Texas receipts for Texas Company?

Response:

No. For the purposes of my response, I presume that the dividend income is
unitary income for Texas Company.

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

If you have any questions or need additional information, please call me at
1-800-531-5441, extension 3-4629.

Sincerely,

Lowell Olsen Dunn
Tax Policy Division