Income/Franchise:
Wisconsin DOR Summarizes Ruling on Intercompany Royalties, Business Purpose and Economic Substance
Wisconsin Tax Bulletin 221, Wis. Dept. of Rev. (4/23). The Wisconsin Department of Revenue (Department) released a bulletin that includes a summary of the Wisconsin Tax Appeals Commission’s recent state corporate franchise tax ruling involving a parent company and its created wholly-owned intellectual property (IP) subsidiary that licensed transferred IP back to the parent in exchange for royalties [see Docket Nos. 10-I-071 and 10-I-072, Wis. Tax App. Comm. (2/24/23) and State Tax Matters, Issue 2023-9, for more details on this recent ruling]. In this ruling, the Department explains that the parent had failed to adequately show it had a valid nontax business purpose for entering into the licensing transactions and that they had economic substance. Specifically, the summary highlights that a viable business entity was already in existence prior to the underlying reorganization paperwork, and the taxpayer failed to focus on whether the two actual transactions (i.e., the transfer of IP to the subsidiary and the licensing of it back to the parent) had economic substance. According to the Department, the taxpayer has since appealed this ruling to the Dane County Circuit Court. Please contact us with any questions.
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