Legal Alert: A Royal Opportunity: Amendments to New York’s Royalty Expense Add-back Statute Leave the Income Exclusion Intact for Prior Years

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On March 28, 2013, the New York State Legislature passed budget legislation (S.2609D/A.3009D) that replaces the existing New York State and City related - party royalty add - back requirements with provisions based on the Multistate Tax Commission’s model add - back statute. In addition, the legislation repeals the New York State and City royalty income exclusions, which permitted taxpayers to exclude royalty income from taxable income when the royalty income would have been subject to the related party add - back requirement. The amendments apply to the New York State corporate franchise tax, bank franchise tax, tax on unrelated business income, personal income tax, and insurance company tax. The amendments also apply to the New York City general corporation tax, unincorporated business tax, banking corporation tax, and resident individual income tax. The legislation, which is expected to be signed by Governor Cuomo, will take effect immediately and will apply to tax years beginning on or after January 1, 2013.

Background -

In 2003, the New York tax law was amended to impose a related - party add - back provision for otherwise deductible royalty expenses received from a related party, subject to a few exceptions. First, a taxpayer was generally not subject to the royalty expense add - back if the royalty payments were made to a related party that paid the amounts to an unrelated entity (i.e., the “conduit” exception). Additionally, the royalty expense add - back generally did not apply if the royalty payments were made to a related foreign entity that was subject to a comprehensive tax treaty with the United States (the “treaty” exception). In 2007, an additional exception to the add - back requirement was adopted for combined filers.

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