The New Jersey Division of Taxation has issued guidance pertaining to the state’s treatment of the federal Tax Cuts and Jobs Act’s one-time repatriation of certain foreign earnings and profits. Under the federal Act, U.S. shareholders of controlled foreign corporations or corporations owning 10 percent or more of another foreign corporation are deemed to receive a repatriated dividend of accumulated post-1986 deferred foreign income in the last tax year beginning before January 1, 2018.
For New Jersey Corporation Business Tax (“CBT”) purposes, the Division is taking the position that the repatriated income is included in entire net income, but subject to a potential dividend exclusion under N.J.S.A. 54:10-4(k)(5). Accordingly, if the income is deemed to be repatriated from a corporation which the taxpayer owns an 80 percent interest in, then the taxpayer will be entitled to a complete dividend exclusion. If the income is from a corporation which the taxpayer owns at least a 50 percent interest in, then the taxpayer may take a 50 percent dividend exclusion. However, in the case of less than 50 percent ownership, there will be no New Jersey dividend exclusion.
The Division’s policy should result in some level of increased revenue to the state based on the CBT’s dividend exclusion rules—many taxpayers are expected to repatriate income from entities that are less than 50 percent owned. Accordingly, these taxpayers would not receive a dividend exclusion under the CBT. Additionally, where a New Jersey CBT taxpayer is deemed to repatriate income from a non-unitary subsidiary, there could very well be a constitutional issue for the Division’s current policy under the Commerce Clause. This can occur where the business of the U.S. taxpayer is separate and distinct from that of the foreign corporation and there is no overlapping of officers, employees, and sharing of resources, property and know-how between the entities.
For New Jersey Gross Income Tax (“GIT”) purposes, the Division is taking the position that any income repatriated under the federal provision should be included in the dividends category of income under the GIT and reported in the same tax year and for the same amount as for federal income tax purposes. The Division’s position, however, may require a statutory change or at least promulgating a regulation in light of the current statutory language. The applicable GIT law provides that a dividend means:
any distribution in cash or property made by a corporation, association or business trust that is not an S corporation, (1) out of accumulated earnings and profits, or (2) out of earnings and profits of the year in which such dividend is paid and any distribution in cash or property made by an S corporation, as specifically determined pursuant to section 16 of P.L.1993, c.173 (C.54A:5-14). N.J.S.A. 54A:5-1f.
Based on the current statute, an argument can be made that any deemed repatriation of foreign income is not a distribution of cash or property under the GIT absent a statutory adoption of the federal regime. The GIT is very different from federal income tax and does not incorporate federal provisions generally. Under current GIT law, only dividends from S corporations clearly implicate federal rules for determining whether such income should be considered a dividend.