A Delaware Investment Holding Company ("DIHC") has been a tax-planning tool to reduce state taxes for Pennsylvania corporations for several decades. DIHC reduces state income taxes through the use of inter-company charges with affiliated entities for interest expenses or royalties on intangibles, such as copyrights, patents, trade secrets, etc. A number of other states eliminated this opportunity by denying certain related party expenses and inter-company charges. The Pennsylvania Department of Revenue has sought legislation to eliminate the benefits of DIHC's for more than twenty years. The new Pennsylvania Budget signed by Governor Corbett finally adds Pennsylvania to the list of states that eliminate this opportunity, but not right away. The new provisions are not effective this year or next year, but only come into effect for tax years beginning after December 31, 2014. With exceptions for "legitimate" non-tax avoidance transactions and an "apportionment" mechanism for these intangible charges, the impact of the lost deductions is unclear. We will need to wait and see how these new rules will take effect and what structuring changes may be needed to reduce the impact of this legislation on Companies currently using a DIHC.
Steve Cherin, Esq.Steve is a lawyer licensed to practice law in the state of Pennsylvania. He provides legal guidance and counsel for a variety of issues that arise in employment, tax, intellectual property, contract formation and disputes. Archives
September 2014
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