Administrative Code

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

23VAC10-120-250. Financial corporations; apportionment.

A. In general.

1. Financial corporations do not apportion Virginia taxable income using the three factor formula but instead apportion income based solely on cost of performance.

2. Financial corporations include, but are not limited to, banks, savings and loan associations, mortgage companies, small loan companies, sales finance companies, brokerage companies, investment companies and other corporations which meet the definition of a financial corporation set forth in subsection B.

3. If a corporation meets the definition of a financial corporation, it apportions Virginia taxable income, less allocable dividends, on a one factor formula based on cost of performance in Virginia over cost of performance everywhere.

B. Definitions.

"Financial corporations" means any corporation not exempt from taxation under § 58.1-401 of the Code of Virginia which derives more than 70% of its gross income from:

a. Fees, commissions, other compensation for financial services rendered;

b. Gross profits from trading in stocks, bonds or other securities;

c. Interest; and

d. Dividends received to the extent included in Virginia taxable income.

"Cost of performance."

a. The "cost of performance" is the cost of all activities directly performed by the taxpayer for the ultimate purpose of obtaining gains or profit except activities directly performed by the taxpayer for the ultimate purpose of obtaining dividends allocable under the provisions of § 58.1-407 of the Code of Virginia. See 23VAC10-120-140.

(i) Such activities do not include activities performed on behalf of a taxpayer, such as those performed on its behalf by an independent contractor.

(ii) The cost of performance does not include the cost of funds (interest, etc.), but does include the cost of activities required to procure loans or other financing.

b. Activities constituting the cost of performance are deemed performed at the situs of real and tangible personal property or the place at which or from which activities are performed by employees of a taxpayer.

c. Cost of performance of a financial institution within and without Virginia shall be determined without regard to the location of borrowers, location of property in which the financial corporation has only a security interest or the cost to the financial corporation of the funds which it lends.

C. Inter-affiliate transactions.

1. If the taxpayer is a member of an affiliated group and renders financial services to its affiliate for compensation, or sells stock, bonds or other securities to its affiliate, or receives interest or dividends from its affiliate, then taxpayer shall include the net income, not gross income, from such transactions for the purpose of the 70% test. The net income for this purpose is the gross income less directly related expenses. Whether an item of expense is directly related to an item of gross income depends on the facts of each case.

2. Taxpayer is a member of an affiliated group if it meets the test of IRC § 1504(a) (concerning ownership of 80% of voting power and nonvoting stock) without regard to IRC § 1504(b) (concerning certain exemptions).

Example A: Retailer sells its accounts receivable to a wholly owned subsidiary called Finance Co. The terms of the accounts provide for interest on balances due of 1½% per month which Finance Co. collects in addition to the balances. Finance Co. borrows from banks in order to purchase the accounts receivable. Finance Co. has several employees and various other expenses.

For purpose of the 70% test Finance Co. receives interest from the consumers not the affiliated retailer. All interest received on the accounts receivable is included for the 70% test without any deduction of directly related expenses. Therefore, Finance Co. qualifies as a financial corporation.

Statutory Authority

§§ 58.1-203 and 58.1-418 of the Code of Virginia.

Historical Notes

Derived from VR630-3-418, eff. January 1, 1985.

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