The New Jersey Division of Taxation (“Division”) amended regulations 18:7-3.25 and 18:7-5.18 and added 18:7-5.19. These new rules are effective for 180 days, at which time, the Division is expected to readopt these rules.
The amendments to regulation 18:7-3.25 involve the computation of tax due on dividends received between January 1, 2017 and January 1, 2019. This change confirms the Division’s treatment of dividends received from 80% or more owned subsidiaries. A taxpayer can reduce the dividend by 95%. Dividends received on or after January 1, 2019 are included in the calculation of entire net income at the standard apportionment factor. For years 2017 and 2018, the amount of income included in either net income is based on an average apportionment factor from 2014 to 2016.
The related party addback rules were changed under amendments to regulation 18:7-5.18. In essence, the “unreasonable” exception to these rules was eliminated. The new rule reads that the related party may be permitted to deduct payments if it can demonstrate by clear and convincing evidence that one of the following circumstances applies:
- Unfair duplicative taxation,
- A technical failure to qualify the transactions under the statutory exceptions,
- An inability or impediment to meet the requirements because of legal or financial constraints,
- An unconstitutional result, or
- The transaction is equivalent to an unrelated loan transaction.
The taxpayer and director can also agree to use an alternative apportionment method to avoid the addback rules.
The new regulations also specify the method of inclusion of Internal Revenue Code (IRC) § 951A [Global Intangible Low-taxed Income (GILTI)] and IRC § 250(b) [Foreign-derived Intangible Income (FDII)] in the calculation of entire net income for separate return filings. Regulation 18:7-5.19 specifies that these items must be included in the calculation of New Jersey entire net income as they would be for federal income tax purposes. Neither item is considered a dividend for purposes of the dividend received exclusions of the New Jersey tax code. However, the deduction provided by IRC § 250(a) is allowable in computing New Jersey income. Net GILTI and FDII receipts are to be included in the denominator of a taxpayer’s apportionment factor as well.
The regulations take effect April 8, 2020. Ryan will continue to monitor any changes to New Jersey income tax rules.
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