2023 Connecticut General Statutes › Title 12 - Taxation › Chapter 208 - Corporation Business Tax › Section 12-218d. - Restriction on the deductibility of interest expenses or costs related to certain transactions with related members.

(a) As used in this section:
(1) “Affiliated group” has the same meaning as in Section 1504 of the Internal Revenue Code.
(2) “Interest expenses and costs” means amounts directly or indirectly allowed as deductions under Section 163 of the Internal Revenue Code.
(3) “Related member” means a person that, with respect to the taxpayer during all or any portion of the taxable year, is
:
(A)
A related entity, as defined in this subsection,
(B)
a component member, as defined in Section 1563(b) of the Internal Revenue Code,
(C)
a person to or from whom there is attribution of stock ownership in accordance with Section 1563(e) of the Internal Revenue Code, other than a statutory business trust of which each beneficiary is not a related entity to the taxpayer, or (D) a person that, notwithstanding its form of organization, bears the same relationship to the taxpayer as a person described in subparagraphs (A) to (C), inclusive, of this subdivision.
(4) “Related entity” means (A) a stockholder who is an individual, or a member of the stockholder's family enumerated in Section 318 of the Internal Revenue Code, if the stockholder and the members of the stockholder's family own, directly, indirectly, beneficially or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer's outstanding stock; (B) a stockholder, or a stockholder's partnership, limited liability company, estate, trust or corporation, if the stockholder and the stockholder's partnerships, limited liability companies, estates, trusts and corporations own directly, indirectly, beneficially or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer's outstanding stock; or (C) a corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of the Internal Revenue Code, if the taxpayer owns, directly, indirectly, beneficially or constructively, at least fifty per cent of the value of the corporation's outstanding stock. The attribution rules of the Internal Revenue Code shall apply for purposes of determining whether the ownership requirements of this subdivision have been met.
(b) For purposes of computing its net income under section 12-217, a corporation shall add back otherwise deductible interest expenses and costs 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.
(c) The adjustments required in subsection (b) of this section shall not apply to an otherwise deductible interest expense or cost if the corporation establishes by clear and convincing evidence, as determined by the commissioner, that: (1) A principal purpose of the transaction giving rise to the payment of interest was not to avoid payment of taxes due under this chapter; (2) the interest is paid pursuant to a contract that reflects an arm's length rate of interest and terms; and (3) either (A) (i) the related member was subject to tax on its net income in this state or another state or possession of the United States or a foreign nation; (ii) a measure of said tax included the interest received from the corporation; and (iii) the rate of tax applied to the interest received by the related member is no less than the statutory rate of tax applied to the corporation under section 12-214, without regard to subsection (b) of section 12-214, minus three percentage points, or (B) the related member is a company subject to tax under chapter 207 or comparable tax under the laws of another state.
(d) The adjustments required in subsection (b) of this section shall not apply in any of the following circumstances:
(1) The corporation establishes by clear and convincing evidence, as determined by the commissioner, that the adjustments are unreasonable.
(2) The corporation and the commissioner agree in writing to the application or use of an alternative method of determining the combined measure of the tax, provided the Commissioner of Revenue Services shall consider approval of such petition only in the event that the petitioners have clearly established to the satisfaction of said commissioner that there are substantial intercorporate business transactions among such included corporations and that the proposed alternative method of determining the combined measure of the tax accurately reflects the activity, business, income or capital of the taxpayers within the state.
(3) The corporation elects, on forms authorized for such purpose by the commissioner, to calculate its tax on a unitary basis including all members of the unitary group, provided there are substantial intercorporate business transactions among such included corporations. Such election to file on a unitary basis shall be irrevocable for and applicable for five successive income years, but shall not be applicable to income years commencing on or after January 1, 2016. Nothing in this subsection shall be construed to limit or negate the commissioner's authority to otherwise enter into agreements and compromises otherwise allowed by law.
(4) The corporation and the related member are both members of a combined group required to file a combined unitary tax return pursuant to section 12-222.
(e) The adjustments required in subsection (b) of this section shall not apply if interest is paid to a related member located in a country with which the United States has a comprehensive income tax treaty.
(f) (1) Gross income, as defined in section 12-213, shall not include any amount received or accrued from a related member that is added back to the preapportionment income of such related member pursuant to subsection (b) of this section.
(2) The receipts factor determined under section 12-218 or 12-218b shall not include any amount received or accrued from a related member that is added back to the preapportionment income of such related member pursuant to subsection (b) of this section.
(g) Nothing in this section shall require a corporation to add to its net income more than once any amount of interest expenses and costs that the corporation pays, accrues or incurs to a related member described in subsection (b) of this section.
(h) Nothing in this section shall be construed to limit or negate the commissioner's authority to make adjustments under section 12-221a or 12-226a.
(June 30 Sp. Sess. P.A. 03-6, S. 78; P.A. 15-179, S. 4; 15-244, S. 152; June Sp. Sess. P.A. 15-5, S. 139, 147.)
History: June 30 Sp. Sess. P.A. 03-6 effective August 20, 2003, and applicable to income years commencing on or after January 1, 2003; P.A. 15-179 made technical changes in Subsec. (d), effective July 2, 2015; P.A. 15-244 amended Subsec. (d) to make technical changes, provide that election under Subdiv. (3) to file on unitary basis shall not be applicable to income years commencing on or after January 1, 2015, and add Subdiv. (4) re corporation and related member that are members of combined group required to file combined unitary tax return, effective June 30, 2015, and applicable to income years commencing on or after January 1, 2015; June Sp. Sess. P.A. 15-5 changed effective date of P.A. 15-244, S. 152, from June 30, 2015, and applicable to income years commencing on or after January 1, 2015, to January 1, 2016, and applicable to income years commencing on or after that date, effective June 30, 2015, and amended Subsec. (d)(3) to provide that election not be applicable to income years commencing on or after January 1, 2016, effective January 1, 2016, and applicable to income years commencing on or after that date.