KRS § 141.205 — KY Code / Title XI / Chapter 141 / Section 141.205
141.205 Disallowance of certain deductions for affiliated entities or related parties
Status: in_force

141.205 Disallowance of certain deductions for affiliated entities or related parties.

(1) As used in this section:

(a) "Intangible property" means franchises, patents, patent applications, trade

names, trademarks, service marks, copyrights, trade secrets, and similar types

of intangible assets;

(b) "Intangible expenses" includes the following only to the extent that the

amounts are allowed as deductions or costs in determining taxable net income

before the application of any net operating loss deduction provided under

Chapter 1 of the Internal Revenue Code:

1. Expenses, losses, and costs for, related to, or in connection directly or

indirectly with the direct or indirect acquisition, use, maintenance,

management, ownership, sale, exchange, or any other disposition of

intangible property;

2. Losses related to, or incurred in connection directly or indirectly with,

factoring transactions or discounting transactions;

3. Royalty, patent, technical, and copyright fees;

4. Licensing fees; and

5. Other similar expenses and costs;

(c) "Intangible interest expense" means only those amounts which are directly or

indirectly allowed as deductions under Section 163 of the Internal Revenue

Code for purposes of determining taxable income under that code, to the

extent that the amounts are directly or indirectly for, related to, or connected

to the direct or indirect acquisition, use, maintenance, management,

ownership, sale, exchange, or any other disposition of intangible property;

(d) "Management fees" includes but is not limited to expenses and costs paid for

services pertaining to accounts receivable and payable, employee benefit

plans, insurance, legal, payroll, data processing, purchasing, tax, financial and

securities, accounting, reporting and compliance services or similar services,

only to the extent that the amounts are allowed as a deduction or cost in

determining taxable net income before application of the net operating loss

deduction for the taxable year provided under Chapter 1 of the Internal

Revenue Code;

(e) "Affiliated group" has the same meaning as in KRS 141.201;

(f) "Foreign corporation" means a corporation that is organized under the laws of

a country other than the United States and that would be a related member if it

were a domestic corporation;

(g) "Related member" means a person that, with respect to the entity during all or

any portion of the taxable year, is:

1. A person or entity that has, directly or indirectly, at least fifty percent

(50%) of the equity ownership interest in the taxpayer, as determined

under Section 318 of the Internal Revenue Code;

2. A component member as defined in Section 1563(b) of the Internal

Revenue Code;

3. A person to or from whom there is attribution of stock ownership in

accordance with Section 1563(e) of the Internal Revenue Code; or

4. A person that, notwithstanding its form of organization, bears the same

relationship to the taxpayer as a person described in subparagraphs 1. to

3. of this paragraph;

(h) "Recipient" means a related member or foreign corporation to whom the item

of income that corresponds to the intangible interest expense, the intangible

expense, or the management fees, is paid;

(i) "Unrelated party" means a person that has no direct, indirect, beneficial or

constructive ownership interest in the recipient; and in which the recipient has

no direct, indirect, beneficial or constructive ownership interest;

(j) "Disclosure" means that the entity shall provide the following information to

the Department of Revenue with its tax return regarding a related party

transaction:

1. The name of the recipient;

2. The state or country of domicile of the recipient;

3. The amount paid to the recipient; and

4. A description of the nature of the payment made to the recipient;

(k) "Other related party transaction" means a transaction which:

1. Is undertaken by an entity which was not required to file a consolidated

return under KRS 141.201;

2. Is undertaken by an entity, directly or indirectly, with one (1) or more of

its stockholders, members, partners, or affiliated entities; and

3. Is not within the scope of subsections (2) and (3) of this section;

(l) "Related party costs" means intangible expense, intangible interest expense,

management fees and any costs or expenses associated with other related party

transactions; and

(m) "Entity" means any taxpayer other than a natural person.

(2) An entity subject to the tax imposed by this chapter shall not be allowed to deduct

an intangible expense, an intangible interest expense, or a management fee directly

or indirectly paid, accrued or incurred to, or in connection directly or indirectly with

one (1) or more direct or indirect transactions with one (1) or more related members

or with a foreign corporation as defined in subsection (1) of this section, or with an

entity that would be included in the affiliated group based upon ownership interest

if it were organized as a corporation.

(3) The disallowance of deductions provided by subsection (2) of this section shall not

apply if:

(a) The entity and the recipient are both included in the same consolidated

Kentucky corporation income tax return for the relevant taxable year; or

(b) The entity makes a disclosure, and establishes by a preponderance of the

evidence that:

1. The payment made to the recipient was subject to, in its state or country

of commercial domicile, a net income tax, or a franchise tax measured

by, in whole or in part, net income. If the recipient is a foreign

corporation, the foreign nation shall have in force a comprehensive

income tax treaty with the United States; and

2. The recipient is engaged in substantial business activities separate and

apart from the acquisition, use, licensing, management, ownership, sale,

exchange, or any other disposition of intangible property, or in the

financing of related members, as evidenced by the maintenance of

permanent office space and full-time employees dedicated to the

maintenance and protection of intangible property; and

3. The transaction giving rise to the intangible interest expense, intangible

expense, or management fees between the entity and the recipient was

made at a commercially reasonable rate and at terms comparable to an

arm's-length transaction; or

(c) The entity makes a disclosure, and establishes by preponderance of the

evidence that the recipient regularly engages in transactions with one (1) or

more unrelated parties on terms identical to that of the subject transaction; or

(d) The entity and the Department of Revenue agree in writing to the application

or use of an alternative method of apportionment under KRS 141.120.

(4) An entity subject to the tax imposed by this chapter may deduct expenses or costs

associated with an other related party transaction only in an amount equal to the

amount which would have resulted if the other related party transaction had been

carried out at arm's length. In any dispute between the department and the entity

with respect to the amount which would have resulted if the transaction had been

carried out at arm's length, the entity shall bear the burden of establishing the

amount by a preponderance of the evidence.

(5) Nothing in this section shall be deemed to prohibit an entity from deducting a

related party cost in an amount permitted by this section, provided that the entity

has incurred related party costs equal to or greater than the amounts permitted by

this section.

(6) If it is determined by the department that the amount of a deduction claimed by an

entity with respect to a related party cost is greater than the amount permitted by

this section, the net income of the entity shall be adjusted to reflect the amount of

the related party cost permitted by this section.

(7) For tax periods ending before January 1, 2005, in the case of entities not required to

file a consolidated or combined return under subsection (1) of this section that

carried on transactions with stockholders or affiliated entities directly or indirectly,

the department shall adjust the net income of such entities to an amount that would

result if such transactions were carried on at arm's length.