Did a treaty-country corporation with a Texas inventory warehouse owe earned-surplus tax when it filed no federal return and had no federal taxable income?

Plain-English summary

The foreign corporation owed no earned-surplus tax if its treaty position meant it had no federal return and no federal taxable income, but the letter did not exempt taxable capital.

The corporation was organized in a treaty country and planned to establish an inventory warehouse in Texas. The requester said the treaty eliminated its federal return filing requirement.

The Comptroller concluded that no federal return and no federal taxable income meant no earned-surplus tax. Separately, it noted that most U.S. treaties did not apply to the taxable-capital component. The response therefore provides no taxable-capital exemption.

Currency note: This is a historical treaty interaction under the former two-component franchise tax. Texas replaced that tax with the margin tax effective January 1, 2008.

What this means for you

Foreign corporations with U.S. treaty positions

Treaty effects can differ by tax base. A federal-income starting point may be zero while a non-income-based state component remains outside the treaty.

Tax professionals

Verify the actual treaty, federal filing conclusion, federal taxable income, and current Texas tax structure separately.

Common questions

Q: Did the corporation owe earned-surplus tax?
A: No, on the assumptions stated.

Q: Did the letter exempt taxable capital?
A: No.

Q: What Texas presence was planned?
A: An inventory warehouse.

Citations and references

• The letter cites no specific treaty or statutory section; its result is limited to the federal-return and federal-taxable-income assumptions stated.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/9812331L

Original ruling text

December 14, 1998

Dear Mr. **:

Thank you for your letter asking whether your client is subject to the earned
surplus component of the Texas Franchise Tax.

You stated in your letter that your client is a foreign (non-U.S.) corporation
that will establish an inventory warehouse in Texas. The foreign corporation
is located in a country with a current U.S. treaty that requires no federal tax
return filing.

As you stated in your letter, we have found that most U.S. treaties do not
apply to the taxable capital component of the franchise tax. Additionally, if
your client does not owe a federal income tax return and has no federal taxable
income, then the client would not owe tax on the earned surplus component of
the Texas franchise tax.

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

If you have any questions about this or any other franchise tax matter, please
call me at 1-800-531-5441, extension 34612. My direct number is (512)
463-4612. You may write me at Tax Policy Division, Comptroller of Public
Accounts, Austin, Texas 78774.

Sincerely,

Janet Spies
Tax Policy Division