Virginia - Franchise fee deduction supported by transfer pricing study and subject-to-tax addback exception limited

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The Virginia Tax Commissioner allowed a taxpayer’s deduction for franchise fees paid when transfer pricing studies supported that such fees reflected arm’s length transactions. Additionally, the taxpayer could claim a subject-to-tax addback exception only for its portion of royalty expenses relating to the recipient’s income that was subject to tax after apportionment. Virginia taxpayers should note that the Department is currently in litigation regarding the subject-to-tax exception. Pending the outcome of the litigation, Virginia taxpayers should consider filing protective claims regarding income taxes paid for related party intangible and interest expenses when the subject-to-tax exception was anything less than a 100% exception. [Virginia Public Document 13-140 (7/19/2013)]


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