Delaware General Assembly

AN ACT TO AMEND TITLE 30 OF THE DELAWARE CODE RELATING TO TAXATION.

“CHAPTER 64. HEADQUARTERS MANAGEMENT CORPORATIONS

§ 6401. Definitions.

As used in this chapter and in §§ 2061 through 2063 of this Title:

(a) ‘Headquarters Management Corporation’ means an entity treated as a corporation under the Internal Revenue Code of the United States (Title 26 of the United States Code) that:

(i) makes an election to be taxed as a Headquarters Management Corporation; and

(ii) whose activities in this State are certified by the Director of Revenue to be confined to investment activities and/or the provision of headquarters services to itself and members of its affiliated group.

(b) ‘Headquarters services’ includes, without limitation, accounts receivable and payable, employee benefit plan, insurance, legal, payroll, data processing, purchasing, and tax, financial and securities accounting, reporting and compliance services provided by a Headquarters Management Corporation to itself and members of its affiliated group, and the maintenance and management of the intangible investments of other members of its affiliated group.

(c) 'Investment activities' means the maintenance and management by a Headquarters Management Corporation of its intangible investments and the collection and distribution of the income from such investments or from tangible property physically located outside this State.

(d) 'Intangible investments' includes, without limitation, investments in stocks, bonds, notes and other debt obligations (including debt obligations of affiliates), patents, patent applications, trademarks, trade names and similar types of intangible assets.

(e) ‘Qualified employee’ means an individual:

(i) employed by a Headquarters Management Corporation after the effective date of its original license on a regular basis 35 or more hours per week to provide headquarters services and/or investment activities within this State; and

(ii) who was not in any capacity an employee in this State on a regular basis 35 or more hours per week of the Headquarters Management Corporation or of any member of its affiliated group before the effective date of its original license.

(f) ‘Operating expense’ means a Headquarters Management Corporation’s cost of its wages, salaries and benefits, and the cost, if any, of other services obtained by it in connection with its investment activities and for the provision of headquarters services to itself and members of its affiliated group.

(g) ‘Expenditure’ means a payment of an operating expense incurred in this State by a Headquarters Management Corporation.

(h) ‘Certified,’ ‘certificate’ or ‘certification’ means or refers to the written determination of the Director of Revenue issued to a corporation that it qualifies as a Headquarters Management Corporation pursuant to the provisions of this chapter.

(i) ‘Director of Revenue’ and ‘Director’ mean the individual appointed as Director of the State of Delaware Division of Revenue or such individual's designee.

(j) ‘Affiliated group' has the meaning provided by § 1504 of the Internal Revenue Code [26 U.S.C. § 1504], but including for this purpose,

(1) Foreign corporations that would otherwise not be includible corporations, and

(2) Partnerships, as defined in § 7701(a)(2) of the Internal Revenue Code [26 U.S.C. .§ 7701(a)(2)], that would be includible if they were classified as corporations, the interests in which were treated as stock and the ownership of such interests satisfied the stock ownership requirements of the said § 1504.

(k) Terms defined in § 502 of this Title or in § 1901 of this Title shall have the same meaning when used in this chapter and in §§ 2061 through 2063 of this Title.

§ 6402. Imposition of income tax on Headquarters Management Corporations.

Every Headquarters Management Corporation shall annually pay a tax in lieu of the taxes imposed under Chapter 19 of this Title equal to the greater of:

(a) The sum of:

(1) 8.7 percent of its Headquarters Management Corporation taxable income derived from headquarters services; and

(2) 4.0 percent of its Headquarters Management Corporation taxable income derived from its investment activities; or

(b) $5,000.

§ 6403. Computation of Headquarters Management Corporation taxable income.

(a) Except as modified in subsections (b) and (c) of this section, the Headquarters Management Corporation taxable income of a Headquarters Management Corporation for any income year means the amount of its federal taxable income for such year as computed for purposes of the federal income tax increased by (i) any interest income (including discount) on obligations issued by states of the United States or political subdivisions thereof other than this State and its subdivisions, and (ii) the amount of any deduction allowed for purposes of the federal income tax pursuant to § 164 of the Internal Revenue Code [26 U.S.C. § 164] for taxes paid on, or according to or measured by, in whole or in part, such corporation's net income or profits, to any state (including this State), territory, county or political subdivision thereof, or any tax paid in lieu of such income tax, and its federal taxable income shall be further adjusted by eliminating:

(1) Dividends received on shares of stock or voting trust certificates of foreign corporations or interest income or royalty income, on which a foreign tax is paid, deemed paid or accrued under the applicable provisions of the Internal Revenue Code [26 U.S.C. § 1 et seq.];

(2) Interest income (including discount) from securities issued by the United States or agencies or instrumentalities thereof and interest income (including discount) arising from obligations representing advances, loans or contractual transactions between corporations which are eligible to file a consolidated return for federal income tax purposes and which are subject to taxation under Chapter 19 of this Title or under this chapter, if the paying corporation eliminates such interest (including discount) in determining its entire net income under Chapter 19 of this Title or in determining its Headquarters Management Corporation taxable income under this section, whichever is applicable; provided, however, that the expenses allocable to interest income from securities issued by the United States or agencies or instrumentalities thereof shall not be allowed as a deduction;

(3) Gains and losses from the sale or other disposition of securities issued by the United States or agencies or instrumentalities thereof or by this State or political subdivisions thereof. Expenses incurred in connection with such gains and losses shall not be considered in computing Headquarters Management Corporation taxable income;

(4) Any deduction allowed for depletion of oil and gas wells under § 611 of the Internal Revenue Code [26 U.S.C. § 611] to the extent such deduction is determined by reference to § 613 of the Internal Revenue Code [26 U.S.C. § 613] (relating to percentage depletion);

(5) An amount equal to the portion of the wages paid or incurred for the taxable year which is disallowed as a deduction for federal purposes under § 280C of the Internal Revenue Code [26 U.S.C. § 280C], relating to the portion of wages for which the new jobs tax credit is claimed;

(6) The cost, not to exceed $5,000, of a renovation project to remove physical design features in a building that restricts the full use of the building by physically handicapped persons. The modification shall be allowed for the taxable year in which the renovation project is completed and is in addition to any depreciation or amortization of the cost of the renovation project. 'Building' means a building or structure or that part of a building or structure and its related sidewalks, curbing, driveways and entrances that are located in this State and open to the general public;

(7) The 'eligible net income' of an Edge Act corporation organized pursuant to § 25(a) of the Federal Reserve Act [12 U.S.C. § 611 et seq.]. The eligible net income of an Edge Act corporation shall be the net income from any international banking facility of such corporation each computed as described in § 1101(a)(1)d. and e. of Title 5; and

(8) Any deduction, to the extent such deduction exceeds $30,000, for a net operating loss carryback as provided for in § 172 of the Internal Revenue Code [26 U.S.C. § 172] or successor provisions; provided, however, that the taxpayer may increase deductions in any year, consistent with the operation of § 172, to carry forward losses which were carried back in calculating federal taxable income but which were prevented from being carried back under this paragraph.

(b) The amount determined under subsection (a) of this section shall be allocated and apportioned to this State in accordance with the following provisions:

(1) Rents and royalties (less applicable or related expenses) from tangible property shall be allocated to the state in which the property is physically located;

(2) Copyright, patent, service mark, trademark and trade name royalties (less applicable or related expenses) shall be allocated to this State;

(3) Gains and losses from the sale or other disposition of real property shall be allocated to the state in which the property, and expenses incurred in connection with dispositions resulting in such gains and losses, is physically located;

(4) Gains and losses from the sale or other disposition of tangible property for which an allowance for depreciation is permitted for federal income tax purposes, and expenses incurred in connection with dispositions resulting in such gains and losses, shall be allocated to the state where the property is physically located or is normally used in the taxpayer's business;

(5) Interest (including discount) to the extent included in determining Headquarters Management Corporation taxable income under subsection (a) of this section, less related or applicable expenses, shall be allocated to this State, except where the facts and circumstances demonstrate that the transaction creating the obligation with respect to which the interest was earned occurred in another state, in which case it shall be allocated to such other state;

(6) If the entire business of the Headquarters Management Corporation is transacted or conducted within this State, the remainder of the amount determined under subsection (a) of this section shall be allocated to this State. If the business of the Headquarters Management Corporation is transacted or conducted in part without this State, such remainder, whether income or loss, shall be apportioned to this State on the basis of the ratio obtained by taking the arithmetical average of these 3 ratios:

(A) The average of the value, at the beginning and end of the income year, of all the real and tangible personal property, owned or rented, in this State by the taxpayer, expressed as a percentage of the average of the value at the beginning and end of the income year of all such property of the taxpayer both within and without this State; provided, that any property, the income from which is separately allocated under paragraph (1) of this subsection or which is not used in the taxpayer's business, shall be disregarded. For the purposes of this paragraph, property owned by the taxpayer shall be valued at its original cost to the taxpayer, and property rented by the taxpayer shall be valued at 8 times the annual rental;

(B) Wages, salaries and other compensation paid by the taxpayer to employees within this State during the income year expressed as a percentage of all such wages, salaries and other compensation paid within and without this State during the income year to all employees of the taxpayer;

(C) Gross receipts from sales of tangible personal property physically delivered within this State to the purchaser or the purchaser's agent (but not including delivery to the United States mail or to a common or contract carrier for shipment to a place outside this State) and gross income from other sources within this State for the income year expressed as a percentage of all such gross receipts from sales of tangible personal property and gross income from other sources both within and without this State for the income year; provided, that any receipts or items of income that are eliminated in determining the taxpayer's Headquarters Management Corporation taxable income or are directly allocated under paragraphs (1) to (6) of this subsection shall be disregarded.

(c) If, in the discretion of the Secretary of Finance, the application of the allocation or apportionment provisions of this section would result in an unfair or inequitable proportion of the taxpayer's Headquarters Management Corporation taxable income being assigned to this State, the Secretary of Finance or the Secretary's delegate may permit or require the exclusion or alteration of the weight to be given to 1 or more of the factors in the formula specified in subsection (b) of this section or the use of separate accounting or other method to produce a fair and equitable result. For purposes of this chapter and of § 2061 of this Title, the Director may, in the Director’s discretion, redistribute, reallocate, or reapportion items of gross income or deduction on account of the providing of headquarters services if the Director determines that such items are disproportionate to their fair market value compared to arm’s length transactions between similar but unrelated companies.

§ 6404. Election and returns.

(a) Election. Every Headquarters Management Corporation desiring to be certified under this chapter shall file an election with its application for a Headquarters Management Corporation license.

(b) Termination of election. An election under this section shall remain in effect until terminated by revocation by the taxpayer or the taxpayer’s failing to limit its activities in this State to headquarters services or investment activities.

(c) Returns. Every Headquarters Management Corporation shall file an annual tentative return and an annual final return regardless of the amount of its estimated tax liability, its gross income or its taxable income.

(1) A tentative return, covering estimated income tax liability for the current taxable year, in such form and containing such information as the Secretary of Finance shall prescribe, shall be filed with the Secretary of Finance on or before the 1st day of the 4th month of the current taxable year.

(2) A final return, in such form and containing such information as the Secretary of Finance shall prescribe, shall be filed with the Secretary of Finance on or before the 1st day of the 4th month immediately following the end of the taxable year.

(d) Certification of returns. Every return shall have annexed thereto a certification by the president, vice-president, treasurer, assistant treasurer, chief accounting officer or any other officer of the taxpayer or other individual duly authorized so to act to the effect that the statements contained therein are true to the best of such officer's or such other individual's knowledge and belief.

§ 6405. Payment of tax.

The tax imposed by this chapter shall be payable as follows:

(1) Calendar year corporations. – 25% of the estimated tax liability for the current taxable year shall each be paid with the tentative return required to be filed on or before April 1 of the current taxable year, the 15th day of June of the current taxable year, the 15th day of September of the current taxable year and the 15^th day of January of the immediately following taxable year.

(2) Fiscal year corporations. – 25% of the estimated tax liability for the current taxable year shall each be paid with the tentative return required to be filed on or before the 1^st day of the 4^th month of the current taxable year, the 15th day of the 6th month of the current taxable year, the 15th day of the 9th month of the current taxable year and the 15th day of the 1st month of the immediately following taxable year.

(3) Additional taxes due on final return. -- Any additional tax due as computed in the final return required to be filed pursuant to § 6404 of this Title shall be paid with such final return.

(4) Tentative tax declarations and payments are not required for returns for taxable periods of less than 92 calendar days.

§ 6406. Regulations.

The Director of Revenue is authorized to promulgate rules, regulations and decisions not inconsistent with this chapter and require such facts and information to be reported as the Director deems necessary for its administration and enforcement and the certification of Headquarters Management Corporations. No rule or regulation adopted pursuant to the authority granted by this section shall extend, modify or conflict with any law of this State, or the reasonable implications thereof.

§ 6407. Taxes of other states.

(a) A Headquarters Management Corporation shall be credited with the amount of any income tax paid under this chapter on income upon which income tax (or tax computed upon or by reference to income) was also paid with respect to the taxable year to any other state of the United States or the District of Columbia.

(b) The credit provided by this section shall be allowed only if the taxpayer establishes to the satisfaction of the Secretary:

(1) The total amount of income derived from sources without this State,

(2) The amount of income derived from each state,

(3) The amount and nature of the tax paid to each state, and

(4) All other information necessary for the verification and computation of such credit.”

“Subchapter VII. Alternative Tax Calculation, Credit and License Fee Reduction for Headquarters Management Corporations

§ 2061. Alternative calculation of Headquarters Management Corporation taxable income.

(a) Except in the case of a Headquarters Management Corporation described in subsection (b) of this section (but only to the extent that paragraph (1) of such subsection does not apply), during each of the ten taxable years commencing with the first taxable year following the effective date of a Headquarters Management Corporation's original license under Chapter 23 of this Title (but contingent upon the subsequent certification by the Director of Revenue as a Headquarters Management Corporation within twelve months of the effective date of such original license), Headquarters Management Corporation taxable income determined under § 6403 of this Title shall be reduced, but not below the tax payable under § 6402(b) of this Title, during such taxable year by:

(1) 20% for each qualified employee of the taxpayer within this State during such taxable year, to a maximum reduction of 99.00%; or

(2) 2.0% for each expenditure during the taxable year [not including any payment of wages, salaries or benefits to or for the benefit of qualified employees] by the taxpayer in this State of $7,500 in excess of 100% of its operating expenses, if any, allocated to this State in the most recent taxable year of the taxpayer ending before the effective date of its original license, to a maximum reduction of 99.00%; or

(3) Any combination of the reduction for new employment under paragraph (1) of this subsection and the reduction for new expenditures under paragraph (2) of this subsection, to a maximum reduction of 99.00 %.

(b) In the case of a Headquarters Management Corporation that conducted any business in this State (or any member of whose affiliated group conducted any business in this State) before the effective date of its original license under Chapter 23 of this Title, during each of the ten years commencing with the first taxable year beginning on the effective date of such original license (but contingent upon the subsequent certification by the Director of Revenue as a Headquarters Management Corporation within twelve months of the effective date of such original license), Headquarters Management Corporation taxable income determined under § 6403 of this Title shall be reduced, but not below the tax payable under § 6402(b) of this Title, during such taxable year as follows:

(1) To the extent set forth in subsection (a) of this section with respect to Headquarters Management Corporation taxable income derived solely from investment activities; and

(2) With respect to Headquarters Management Corporation taxable income derived from headquarters services, by:

(A) 20% for each qualified employee of the taxpayer within this State during such taxable year, conditioned upon the employment by the taxpayer within this State during such taxable year of a total number of qualified employees that is 25% or more greater than the total number of individuals employed within this State before the effective date of such original license [except that, for purposes of counting the total number of individuals employed within this State before the effective date of such original license, individuals employed solely by corporations whose activities within this State were confined to investment activities as defined in § 6401(c) of this Title shall not be counted] by (i) itself and all members of its affiliated group, and (ii) entities that become members of its affiliated group by merger or acquisition on or after the effective date of such original license, to a maximum reduction of 99.00%; or

(B) 2.0% for each expenditure during the taxable year [not including any payment of wages, salaries or benefits to or for the benefit of qualified employees] by the taxpayer in this State of $7,500 certified to be in excess of 125% of its operating expenses allocated to this State in the most recent taxable year of the taxpayer ending before the effective date of such original license by (i) itself and all members of its affiliated group, and (ii) entities that become members of its affiliated group by merger or acquisition on or after the effective date of such original license, to a maximum reduction of 99.00%; or

(C) Any combination of the reduction for new employment under subparagraph (A) of this paragraph and the reduction for new expenditures under subparagraph (B) of this paragraph, to a maximum reduction of 99.00 %.

§ 2062 Credit against income tax for new Headquarters Management Corporation employment.

(a) Except in the case of a Headquarters Management Corporation subject to the tax payable under § 6402(b) of this Title, any Headquarters Management Corporation that at all times during any taxable year consisting of 12 full months employs five or more qualified employees shall be allowed a credit against the income tax otherwise imposed by Chapter 64 of this Title that is in excess of $5,000 for such taxable year and for each of the four immediately following taxable years in which all conditions set forth in this section shall be met, in the amount determined under subsection (b) of this section.

(b) Subject to the limitation contained in subsection (c) of this Section, the amount of the credit allowable under Subsection (a) of this section with respect to the qualified employees employed during each taxable year falling within the 5-year life of such credit shall be the sum of four hundred dollars multiplied by that number that is the difference between (i) the number of qualified employees employed by the taxpayer on the last day of such taxable year, and (ii) the number of individuals, if any, that were employed by the taxpayer in this State on the day immediately preceding the effective date of its original license as a Headquarters Management Corporation under Chapter 64 of this Title.

(c) The amount of the credit allowable under this section for any taxable year shall not (i) exceed 50 percent of the amount of tax imposed upon the taxpayer by § 6402(a) of this Title for such taxable year (computed without regard to this section) that is in excess of the minimum tax required by § 6402(b) of this Title, nor (ii) reduce the tax imposed upon the taxpayer below the minimum tax required by § 6402(b) of this Title.

(d) The amount of the credit determined under this section for any taxable year that is not allowable for such taxable year solely as a result of the limitation contained in subsection (c) of this section shall be a credit carryover to each of the following taxable years that fall within the 5-year life of the credit. The entire amount of the credit that is not so allowable shall be carried to the earliest of such following taxable years.

§ 2063. Occupational license; exemption from occupational gross receipts license fees.

(a) A Headquarters Management Corporation shall obtain a license pursuant to the provisions of Chapter 21 and § 2301(a) of this Title.

(b) A Headquarters Management Corporation shall be exempt from payment of fees set forth in subsections (b) and (d) of § 2301 of this Title.

§ 2064. Regulations.

The Director of Revenue is authorized to promulgate rules, regulations and decisions not inconsistent with this subchapter and require such facts and information to be reported as the Director deems necessary for its administration and enforcement. No rule or regulation adopted pursuant to the authority granted by this section shall extend, modify or conflict with any law of this State, or the reasonable implications thereof.”

“(27) Headquarters Management Corporation, $5,000; provided, however, that in the case of any affiliated group, as defined in § 6401(j) of this Title, only one (1) member of such affiliated group that is a Headquarters Management Corporation shall be liable for a $5,000 annual license tax under this paragraph, and each other member of such affiliated group that is a Headquarters Management Corporation shall pay a license tax of $500. For purposes of this paragraph, 'Headquarters Management Corporation' has the meaning set forth in § 6401(a) of this Title.”

Approved June 18, 2004