Exemption for affiliated groups

# A.

An affiliated group is composed of two or more corporations or chains of corporations. An affiliated group may be composed of two or more other types of entities if such entities satisfy the requirements to be an affiliated group as if they were corporations and the ownership interests therein were stock. The terms "entity" and "affiliated group" are defined in 23VAC10-500-10. The filing of a consolidated income tax return is presumptive of an affiliated group, but not conclusive.

# B.

No locality shall impose a license fee or levy a license tax on gross receipts or purchases derived from transactions that occur between members of the affiliated group. Affiliated corporations are not exempt from the license tax or fee from gross receipts or purchases conducted with nonaffiliated entities. Localities may also levy a wholesale license tax on an affiliated corporation for sales to nonaffiliated entities, even if the tax would be based on purchases from an affiliated corporation. Sales by the affiliated corporation to a nonaffiliated entity means sales by the affiliated corporation to the nonaffiliated entity where goods sold by the affiliated corporation or its agent are manufactured or stored in the Commonwealth prior to their delivery to the nonaffiliated entity.

# C.

Affiliated groups are one of two types, either parent-subsidiary or brother-sister.

# 1.

Parent-subsidiary control group. A parent-subsidiary affiliated group consists of one or more chains of corporations in which a parent corporation directly owns at least 80% of the stock of at least one of the corporations subject to inclusion in the affiliated group, and at least 80% of the stock of any corporations subject to inclusion in the affiliated group, other than the parent corporation, are owned directly by one or more of the corporations subject to inclusion in the affiliated group. The percentages of stock throughout this section refer to the voting power of all classes of stock and each class of nonvoting stock subject to inclusion. Stock does not include nonvoting stock that is limited and preferred as to dividends in § 58.1-3700.1 1(b) of the Code of Virginia. For example:

a. Corp. A owns 80% of Corp. B. Corp. B owns 80% of Corp. C.

Corp. A

→

80%

→

Corp. B

↓

80%

↓

Corp C

Corp. A is the common parent of a parent-subsidiary affiliated group of A, B and C corporations.

b. Corp. B owns 80% of Corp. C and 80% of Corp. D. Corp. C owns 50% of Corp. F. Corp. D owns 30% of Corp. F.

Corp. B

→

80%

→

Corp. C

↓

↓

80%

50%

↓

↓

Corp D

→

30%

→

Corp. F

Corp. B is the common parent of the B, C, D, and F affiliated group.

# 2.

Brother-sister affiliated group.

a. A brother-sister affiliated group exists if the following elements occur:

(1) Two or more corporations are owned by five or fewer persons (or estates or trusts); and

(2) A total membership test is met. Total ownership occurs when the shareholder group owns at least 80% of the total value of all stock or the total voting power of all classes of stock entitled to vote; and

(3) A common ownership test is met. Common ownership occurs when the shareholder group owns more than 50% of the total value of all stock or the total voting power of all classes of stock entitled to vote. The stock held by each person (estate or trust) is considered only to the extent that the stock ownership is identical for each corporation.

b. The best way to apply this test is to put the respective shareholders and corporations into charts. Shareholders are listed down the first column and corporations are listed in the first row. Each shareholder's percentage of stock ownership is placed in the respective cell. The vertical columns are totaled to determine the 80% test. The horizontal columns are totaled into the identical ownership column and then the identical ownership column is totaled to determine the 50% test. Any owner who does not own at least some stock in each corporation is not considered in either the 50% test or the 80% test.

Example 1:

Individual shareholder A owns 30% of Corp. E, 40% of Corp. F, and 20% of Corp. G

Individual shareholder B owns 50% of Corp. E, 20% of Corp. F, and 30% of Corp. G

Individual shareholder C owns 10% of Corp. E, 20% of Corp. F, and 10% of Corp. G

Individual shareholder D owns 10% of Corp. E, 20% of Corp. F, and 30% of Corp. G

Corporations

Shareholders

E Corp.

F Corp.

G Corp.

Extent of Shareholder's Identical Ownership

A

30%

40%

20%

20%

B

50%

20%

30%

20%

C

10%

20%

10%

10%

D

10%

20%

30%

10%

Totals

100%

100%

90%

60%

The vertical columns are totaled to determine the 80% test. The horizontal columns are totaled to determine the 50% test. Since all three test are met, E, F & G are an affiliated group.

Example 2:

Same facts as in the first example except that Shareholder A owns 40% of Corp. E, Shareholder B owns 10% of Corp. F, Shareholder C owns 30% of Corp. G and Shareholder D owns 0% of Corp. E and 0% of Corp. G.

Corporations

Shareholders

E Corp.

F Corp.

G Corp.

Extent of Shareholder's Identical Ownership

A

40%

40%

20%

20%

B

50%

10%

30%

10%

C

10%

20%

30%

10%

D

0%

20%

0%

0%

Totals

100%

90%

80%

40%

Corporations E, F, and G are not an affiliated group because the 50% test is not met. Owner D is not considered in the calculation since D does not own stock in each corporation.

However, as shown in the following chart, Corporations E & F are an affiliated group in the previous example:

Corporations

Shareholders

E Corp.

F Corp.

G Corp.

Extent of Shareholder's

Identical Ownership

A

40%

40%

40%

B

50%

10%

10%

C

10%

20%

10%

D

0%

20%

0%

Totals

100%

90%

60%