A new opportunity may exist for franchisors to claim an exception to Virginia’s royalty addback statute based on a recent Circuit Court decision.
In Wendy's International Inc. v. Virginia Dep't of Taxation, decided March 29, the Circuit Court of the City of Richmond held that Wendy's qualified for the “unrelated party” addback exception for royalties paid to a related party, even though the related party did not directly license IP to the unrelated licensees, and granted Wendy’s motion for summary judgment. The Wendy's decision means that a Virginia taxpayer can qualify for the “unrelated party” addback exception if the related member receiving the payments indirectly licenses its intangible property through sublicenses between the taxpayer and unrelated franchisees.
Virginia Code § 58.1-402(B)(8)(a) requires taxpayers to add back to federal taxable income the amount of any intangible expenses directly or indirectly paid, accrued, or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions with one or more related members, to the extent that such expenses and costs were deductible or deducted in computing federal taxable income for Virginia purposes. The statute provides an exception, however, where the related member derives at least one-third of its gross revenues from the licensing of intangible property to parties who are not related members, and the transaction giving rise to the expenses and costs between the corporation and the related member was made at rates and terms comparable to the rates and terms of agreements that the related member has entered into with parties who are not related members for the licensing of intangible property. Virginia Code § 58.1-402(B)(8)(a)(2).
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