Title 103 | Chapter 016 | Regulation 230


103 KAR 16:230.Intangible expenses, intangible interest expense, and management fees.

Section 1.

Definitions.

(1)

"Actual comparables" means transactions between the recipient and unrelated parties that are identical to the subject transaction.

(2)

"Arm's length transaction" means a freely negotiated transaction between unrelated parties as provided in 26 C.F.R. 1.482-1.

(3)

"Comprehensive income tax treaty" means a convention, or agreement, entered into by the United States, and approved by Congress, with a foreign government for the allocation of all categories of income subject to taxation or the withholding of tax on interest, dividends, and royalties, in order to prevent double taxation of the respective nations' residents, and to promote the sharing of information.

(4)

"Measured by, in whole or in part, net income" means that the receipt of the payment by the recipient is reported and included in income for purposes of a tax on net income or in the franchise for purposes of the franchise tax.

(5)

"Reported and included in income for purposes of a tax on net income or in the franchise," means:

(a)

For a tax on net income, reported and included in the net income apportioned or allocated to the taxing jurisdiction; or

(b)

For a franchise tax, reported and included in the franchise apportioned or allocated to the taxing jurisdiction.

(6)

"Subject transaction" means the transaction giving rise to the intangible expense, intangible interest expense, or management fee.

Section 2.

Disclosure; General. As part of the required disclosure, the entity shall provide a description of the nature of the payment made to the recipient. This description shall contain:

(1)

For intangible expenses or intangible interest expenses:

(a)

A narrative regarding the subject transaction;

(b)

The extent of the rights being transferred, for example, if a patent is being licensed:

1.

Whether that license is exclusive or non-exclusive; and

2.

Whether the transferee has any rights to sublicense;

(c)

How the amount of the payment is calculated; and

(d)

If there is a document that sets forth the terms of the subject transaction, a copy of that document; and

(2)

For management fees:

(a)

A narrative of the services being performed for the entity by the recipient;

(b)

How the amount of the payment is calculated; and

(c)

If there is a document that sets forth the terms of the transaction, a copy of that document.

Section 3.

Disclosure; Arm's Length Transaction. An entity may be required to establish that the subject transaction was made at a commercially reasonable rate and at terms comparable to an arm's length transaction.

(1)

If there are actual comparables, the actual comparables shall be used.

(2)

If there are no actual comparables, the two (2) primary factors to take into account if determining whether the subject transaction was made at a commercially reasonable rate and at terms comparable to an arm's length transaction shall be:

(a)

The degree of comparability between the subject transaction and the proposed comparable transactions; and

(b)

The quality of the data and assumptions used in the analysis.

Section 4.

Disclosure; Intangible Expense, Intangible Interest Expense, or Management Fee. With respect to an intangible expense, intangible interest expense, or management fee, the entity shall make additional disclosures if it cannot utilize any of the other methods to establish that it is entitled to the deduction. The entity shall show that 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.

Section 5.

Corporation or Pass-Through Entity. A corporation or pass-through entity that during the taxable year directly or indirectly paid, accrued, or incurred intangible expenses, intangible interest expenses, or management fees to a related member or foreign corporation shall attach to its tax return filed with the department:

(1)

Schedule RPC, Revenue Form 41A720RPC; and

(2)

Any additional disclosures required by Sections 2, 3, and 4 of this administrative regulation.

Section 6.

The disclosures related to management fees and the provisions of Section 5 of this administrative regulation shall apply to taxable years beginning on or after January 1, 2014.

Section 7.

The forms and materials prescribed herein may be inspected, copied, or obtained, subject to applicable copyright law, from 8:00 a.m. to 4:30 p.m. at the Kentucky Department of Revenue, 501 High Street, Frankfort, Kentucky 40601; at any Kentucky Department of Revenue Taxpayer Service Center during normal operating hours; and on the department's Web site at http:\\revenue.ky.gov.

HISTORY: (32 Ky.R. 1823; Am. 2289; 33 Ky.R. 66; eff. 8-7-2006; 39 Ky.R. 357, 784; eff. 11-1-2013; 45 Ky.R. 1307, 2059; eff. 2-1-2019.)

7-Year Expiration: 2/1/2026

Last Updated: 12/15/2021


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