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Virginia Administrative Code
Title 23. Taxation
Agency 10. Department of Taxation
Chapter 120. Corporation Income Tax
1/27/2023

23VAC10-120-20. Definitions.

The following words and terms, when used in this chapter, shall have the following meanings unless the context clearly indicates otherwise:

"Affiliated" means a group of corporations each of which is itself subject to Virginia income tax and in which (i) one corporation owns at least 80% of the voting stock of the other or others, or (ii) at least 80% of the voting stock of two or more corporations is owned by the same interests.

For the purpose of § 58.1-442 of the Code of Virginia, it is not necessary for all members of a controlled group to be subject to Virginia income tax in order for some of the members, otherwise eligible, to file a consolidated or combined return. For example, two or more corporations subject to Virginia income tax may be 80% owned by a foreign corporation not subject to Virginia income tax. All of the subsidiaries subject to Virginia income tax may file a consolidated or combined return without the foreign parent corporation.

"Compensation" means, for the purpose of allocation and apportionment under § 58.1-406 of the Code of Virginia as used in computing the payroll factor under § 58.1-412 of the Code of Virginia, all remuneration or wages for employment as defined in IRC § 3121(a) except that compensation includes the excess wages over the contribution base defined in IRC § 3121(a)(1).

1. Generally compensation will be the gross wages, salaries, tips, commissions and other remuneration paid to employees and reported to the Internal Revenue Service. The department will accept the gross amounts reported to the IRS on Forms W-2/W-3, Form 940 or the accounting records of the corporation provided that all of the employees of the corporation are included in such reports or records.

2. If the corporation has any employees who are not subject to the F.I.C.A. and F.U.T.A. payroll taxes or are not subject to U.S. income tax because they are nonresident aliens, compensation includes all wages, salaries, tips, commissions and other remuneration paid to or for such employees in addition to the compensation in subdivision 1 above.

3. The corporation shall determine compensation on a consistent basis so as not to distort the compensation paid to employees located within and without Virginia. In the event the corporation is not consistent in its reporting, it shall disclose in its return to Virginia the nature and extent of such inconsistency.

4. The terms "employees" and "personal services" shall have the same meaning as used in the context of employment in IRC § 3121(b).

5. The term "paid or accrued" means either (i) cash or property paid to employees and reported to the IRS as in subdivision 1 above, or (ii) amounts properly accrued on the books of the corporation under its accounting method for federal income tax purposes, but not both.

"Corporation" means any entity created as such under the laws of the United States, any state, territory or possession thereof, the District of Columbia, or any foreign country or any political subdivision of any of the foregoing, or any association, joint stock company, partnership or any other entity subject to corporation income taxes under the United States Internal Revenue Code. See IRC § 7701.

"Domestic corporation" means a corporation, as defined above, organized, created or existing under the applicable laws of the Commonwealth of Virginia. Compare IRC § 7701(a)(4).

"Foreign corporation" means a corporation, as defined above, which is not a domestic corporation. Registration of a foreign corporation with the State Corporation Commission for the privilege of doing business in Virginia shall not make a corporation a domestic corporation.

"Foreign source income" means income computed in accordance with the following principles:

1. The federal taxable income of corporations organized under the laws of the United States, any of the 50 states or the District of Columbia (U.S. domestic corporations) includes their worldwide income. Virginia law provides a subtraction for "foreign source income" if any is included in federal taxable income. Corporations that are not U.S. domestic corporations include in federal taxable income only income from U.S. sources or income effectively connected with a U.S. trade or business. Such corporations will not have any "foreign source income" included in federal taxable income.

2. Foreign source income does not include all income from sources without the United States but is limited to specified types of income and is also limited by the federal source rules in IRC §§ 861 et seq. and the regulations thereunder in determining the source of a particular item of income.

3. Corporations having foreign source income determine the amount of the subtraction by the following procedure:

a. The specified types of gross income included in federal taxable income are segregated. The types of income are: interest, dividends, rents, royalties, license and technical fees, also gains, profits and other income from the sale of intangible or real property.

b. The federal source rules are applied to determine the source of each item, particularly whether or not the item is effectively connected with the conduct of a U.S. trade or business.

c. The federal procedure in Treasury Reg. § 1.861-8 is applied to allocate and apportion expenses to income derived from U.S. and foreign sources.

d. The gross income from sources without the U.S. from subdivision 3 b less the expenses allocated and apportioned to such income in subdivision 3 c is the foreign source income for purposes of the Virginia subtraction.

4. All income and expenses included in foreign source income and property or other activity associated with such income and expenses shall be excluded from the factors in the Virginia formula for allocating and apportioning Virginia taxable income to sources within and without Virginia.

"Income and deductions from Virginia sources" means items of income, gain, loss and deduction attributable to the ownership, sale, exchange or other disposition of any interest in real or tangible personal property in Virginia or attributable to a business, trade, profession or occupation carried on in Virginia or attributable to intangible personal property employed in a business, trade, profession or occupation carried on in Virginia.

A. If the entire business of a corporation is not deemed to have been transacted or conducted within this Commonwealth by § 58.1-405 of the Code of Virginia, then the "income from Virginia sources" means that portion of the corporation's Virginia taxable income resulting from the allocation and apportionment formulas set forth in §§ 58.1-406 through 58.1-421 of the Code of Virginia.

1. Allocable income is limited to certain dividends. See § 58.1-407 of the Code of Virginia.

2. Apportionable income is Virginia taxable income less allocable income. Apportionment formulas are then applied to determine the part of apportionable income that is income from Virginia sources. Generally, a corporation will have income from Virginia sources if there is sufficient business activity within Virginia to make any one or more of the following apportionment factors positive: (i) vehicle miles (for motor carriers); (ii) cost of performance (for financial corporations); (iii) completed contracts (for certain construction corporations); (iv) revenue car miles (for railway companies); and (v) property, payroll or sales (for all other corporations).

3. See §§ 58.1-408 through 58.1-421 of the Code of Virginia and the regulations thereunder for details. Accordingly, a foreign corporation may be subject to Virginia income tax on the portion of its income deemed to be derived from Virginia sources under apportionment formulas even though no specific portion of its gross or net income may be separately identified as being derived directly from Virginia.

B. Certificate of authority.

1. §§ 13.1-757 and 13.1-919 of the Code of Virginia provide that if a corporation's only activity in Virginia is limited to certain activity in connection with investment in notes, bonds or other instruments secured by the deeds of trust on property located in Virginia, such corporations shall not be deemed to be transacting business in Virginia for purposes of §§ 13.1-757 and 13.1-919 of the Code of Virginia which require foreign corporations to obtain a certificate of authority from the State Corporation Commission before transacting business in Virginia. All corporations having income from Virginia sources are subject to Virginia income tax regardless of whether or not they are required to obtain a certificate of authority.

2. A foreign corporation whose only connection with Virginia is the receipt of interest on notes, bonds or other instruments secured by deeds of trust on property located in Virginia will have no payroll or real or tangible personal property located in Virginia. Although the interest may be paid by a Virginia resident, for purposes of the sales factor the gross receipts will not be assigned to Virginia because there is no income producing activity in Virginia. See § 58.1-416 of the Code of Virginia. If the corporation is a financial corporation as defined in § 58.1-418 of the Code of Virginia there would be no costs of performance in Virginia. Therefore, such a corporation would have no income from Virginia sources and, since such a corporation is not required to obtain a certificate of authority, it would not be required to file a Virginia income tax return. See 23VAC10-120-310. However, if such a corporation acquires real or tangible personal property in Virginia by foreclosure or any other means the corporation will have property (or cost of performance) in Virginia. Therefore the corporation will have income from Virginia sources and be required to file a Virginia income tax return.

C. In the course of computing income from Virginia sources a corporation may be required to make computations solely for that purpose or maintain records used only for that purpose. The effects on tax liability of a method used to determine any components of income from Virginia sources and the burden of maintaining records not otherwise maintained and of making computations not otherwise made shall be taken into consideration in determining whether such method is sufficiently precise.

D. Example. Corporation A is a manufacturer of paper products conducting all of its manufacturing, selling and shipping operations outside Virginia. It makes no sales to customers in Virginia. It therefore has no gross income which may be identified as being derived directly from Virginia. However, the corporation does operate a facility in Virginia solely for the purchase of pulpwood for shipment to its manufacturing plants in other states.

While corporation A has no gross income derived directly from Virginia, it has property and payroll in this state. Accordingly, Corporation A has income from Virginia sources based on apportionment factors.

"Sales" means the gross receipts of the corporation from all sources not allocated under § 58.1-407 of the Code of Virginia (dividends) whether or not such gross receipts are generally considered as sales. In the case of the sale or other disposition of intangible property, gross receipts shall be disregarded and only the net gain from the transaction shall be included.

A. Manufacturing sales. In the case of a taxpayer whose business activity consists of manufacturing and selling, or purchasing and reselling goods or other property of a kind which would properly be included in the inventory of the taxpayer primarily for sale to customers in the ordinary course of its trade or business, gross receipts means gross sales, less returns and allowances, and includes service charges, carrying charges, or time-price differential charges incidental to such sales.

B. Sales made in other types of business activity.

1. If the business activity consists of providing services such as the operation of an advertising agency, or the performance of equipment service contracts, "sales" includes the receipts from performance of such service including fees, commissions, and similar items.

2. In the case of cost plus fixed fee contracts, such as the operation of a government owned plant for a fee, "sales" include the entire reimbursed cost, plus the fee.

3. In the case of the sale, assignment, or licensing of intangible property such as patents and copyrights, "sales" includes only the net gain from the sale or disposition.

4. In the case of the sale of real or personal property, "sales" includes the gross proceeds from such sales.

5. The term "sales" does not include amounts required by federal law to be included in federal taxable income as recapture of items deducted in prior years.

"State" means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, a territory or possession of the United States, and any foreign country. Note that this definition applies only within the allocation and apportionment section of this chapter. When used elsewhere in the chapter the term "state" may or may not include foreign countries and U.S. possessions, depending on the context.

Statutory Authority

§§ 58.1-203 and 58.1-302 of the Code of Virginia.

Historical Notes

Derived from VR630-3-302; adopted December 12, 1990, eff. January 30, 1991.

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