TITLE 23. TAXATION
Titles of Regulations: 23VAC10-110. Individual Income
Tax (adding 23VAC10-110-145).
23VAC10-120. Corporation Income Tax (adding
23VAC10-120-103).
Statutory Authority: § 58.1-203 of the Code of Virginia.
Public Hearing Information: No public hearings are
scheduled.
Public Comment Deadline: October 19, 2018.
Effective Date: November 3, 2018.
Agency Contact: Matthew Huntley, Lead Tax Policy
Analyst, Department of Taxation, 600 East Main Street, 15th Floor, Richmond, VA
23219, telephone (804) 786-2010, or email matthew.huntley@tax.virginia.gov.
Basis: Chapter 762 of the 2017 Acts of Assembly requires
the Department of Taxation to promulgate regulations regarding the newly
established individual and corporate income tax subtraction for income
attributable to an investment in a Virginia venture capital account prior to
December 31, 2017. To the extent that this regulatory action sets forth the
process that an investment fund will use to apply for certification as a
Virginia venture capital account, the authority for this regulatory action is
mandatory.
Section 58.1-203 of the Code of Virginia provides that the
"Tax Commissioner shall have the power to issue regulations relating to
the interpretation and enforcement of the laws of this Commonwealth governing
taxes administered by the Department." To the extent that this regulatory
action will define terms that were left undefined by the legislation, the
authority for this regulatory action is discretionary.
Purpose: Chapter 762 of the 2017 Acts of Assembly
establishes an individual and corporate income tax subtraction for income
attributable to an investment in an investment fund that has been certified by
the department as a Virginia venture capital account. This subtraction was
codified in § 58.1-322.02 of the Code of Virginia for individual income
tax purposes and in § 58.1-402 of the Code of Virginia for corporate
income tax purposes.
To be certified as a Virginia venture capital account for
purposes of this subtraction, an investment fund must first register with the
department prior to December 31, 2023. As part of such registration, the
investment fund must (i) indicate that it intends to invest at least 50% of the
capital committed to its fund in qualified portfolio companies and (ii) provide
documentation that it employs at least one investor who has at least four years
of professional experience in venture capital investment or substantially
equivalent experience.
Once the investment fund actually invests at least 50% of the
capital committed to its fund in qualified portfolio companies, it must notify
the department. The department is then required to certify such investment fund
as a Virginia venture capital account.
The second enactment clause of Chapter 762 requires the
department to promulgate regulations prior to December 31, 2017, establishing
procedures regarding (i) registration of an investment fund as a Virginia
venture capital account; (ii) provision of documentation regarding an
investor's training, education, or experience; and (iii) certification of an
investment fund as a Virginia venture capital account by the department.
This regulatory action establishes such procedures regarding
the individual and corporate income tax subtraction for income attributable to
an investment in a Virginia venture capital account, and, based on §§
58.1-322.02 and 58.1-402 of the Code of Virginia, provides definitions
essential to those procedures. Government must have predictable and adequate
revenue to provide for the health, safety, and welfare of citizens. Tax
regulations enhance customer service and voluntary compliance. The
interpretations, examples, and other guidance in tax regulations ensure uniform
application of the tax laws to taxpayers. Business taxpayers in particular find
regulations essential in predicting the tax consequences of transactions and
avoiding unanticipated tax assessments as the result of audits. Tax regulations
also ensure that audits and other compliance activity result in the assessment
and collection of the correct amount of tax.
Rationale for Using Fast-Track Rulemaking Process: The
fast-track rulemaking process is intended for proposed regulations that are
expected to be noncontroversial. As this regulatory action establishes the
process that an investment fund will be required to utilize to apply for
certification as a Virginia venture capital account and defines certain terms
for purposes of providing guidance to taxpayers regarding the subtraction, this
action is not expected to be controversial.
Substance: This regulatory action requires that every
investment fund desiring to be certified by the department as a Virginia
venture capital account for purposes of the subtraction first register with the
department by submitting an application indicating that it intends to invest at
least 50% of the capital committed to its fund in qualified portfolio companies
and employs at least one investor who has at least four years of professional
experience in venture capital investment or substantially equivalent
experience.
This regulatory action (i), for purposes of the experienced
investor requirement, requires an investment fund to include with its
registration application documentation of the investor's work experience,
training, and education demonstrating that such individual meets the
experienced investor requirement; (ii) requires the department to, upon
approval of an investment fund's registration application, provide
certification to the investment fund stating that such application has been
approved, and such certification will only be valid for the calendar year for
which it is issued; (iii) provides that, once an investment fund has met the
experienced investor requirement actually invests at least 50% of the capital
committed to its fund in qualified portfolio companies, it may apply to the
department for certification as a Virginia venture capital account; (iv)
requires the investment fund to provide documentation demonstrating that it has
met the investment requirement; (v) may require the investment fund to provide
certain information regarding its investors as determined by the department;
(vi) requires the department to, upon approval of an investment fund's
application for certification as a Virginia venture capital account, provide
certification to the investment fund stating that it is a Virginia venture
capital account for purposes of the subtraction, and such certification will
only be valid for the calendar year for which it is issued; (vii) requires an
investment fund to submit both applications to the department and all necessary
attachments no later than January 31 of the calendar year following the
calendar year for which the investment fund is applying for certification as a
Virginia venture capital account; and (viii) defines terms essential to the
clarity of the provisions, some of which are based on definitions in §§ 58.1-322.02
and 58.1-402 of the Code of Virginia.
Issues: This regulatory action establishes procedures
regarding the individual and corporate income tax subtraction for income
attributable to an investment in a Virginia venture capital account and defines
certain terms for purposes of providing guidance to taxpayers regarding the
subtraction. Therefore, it will provide advantages to investment funds desiring
certification as a Virginia venture capital account and to individual and
corporate taxpayers eligible to claim the subtraction. Establishing such
procedures will enhance the efficiency of the application process and of the
overall administration of the subtraction. This regulatory action will result
in no apparent disadvantages to the public or to the Commonwealth.
Department of Planning and
Budget's Economic Impact Analysis:
Summary of the Proposed Amendments to Regulation. As required
by Chapter 762 of the 2017 Acts of Assembly,1 the Department of
Taxation (Department) proposes to establish procedures regarding how an
investment fund may apply for certification as a Virginia venture capital
account.
Result of Analysis. Benefits likely outweigh costs for all
proposed changes.
Estimated Economic Impact. In 2017, Chapter 762, which allows a
subtraction from individual or corporate taxable income for qualifying
investments in certified Virginia venture capital accounts, became law. Chapter
762 specifies that investment funds must meet certain criteria in order to
qualify for certification as a Virginia venture capital account and further
specifies that only investments made in Virginia venture capital accounts that
were certified between January 1, 2018, and December 31, 2023, will qualify for
the allowed taxable income subtraction.2
The Department now proposes this regulatory action to implement
the certification program for Virginia venture capital accounts. The proposed
regulatory requirements are substantially identical to those in the authorizing
legislation but for two areas. The Department added several definitions that
will tend to clarify these requirements and, as the legislation was silent on
the mechanics of certification, the Department added a requirement that
"every investment fund desiring to be certified…must first register with
the Department."3
This proposed regulation, and its underlying statute, allow but
do not require certification of certain investments. Because of this, no
investment fund is likely to pursue certification unless they judge that the
extra benefit that may accrue to their fund on account of the allowable
subtraction those investments will generate will outweigh any costs that they
may incur to become certified. Those costs would likely include time and other
costs associated with the application process as well as time spent keeping
required records.
Businesses and Entities Affected. This regulatory action will
affect all investment funds who apply for certification as a Virginia venture
capital account, individuals and businesses who administer such accounts and
individual and corporate taxpayers who invest in qualified accounts.
Localities Particularly Affected. No locality will be
particularly affected by this regulatory action.
Projected Impact on Employment. These proposed regulatory
changes are unlikely to affect employment in the Commonwealth.
Effects on the Use and Value of Private Property. These
proposed regulatory changes are unlikely to affect the use or value of private
property in the Commonwealth.
Real Estate Development Costs. These proposed regulatory
changes are unlikely to affect real estate development costs in the
Commonwealth.
Small Businesses:
Definition. Pursuant to § 2.2-4007.04 of the Code of Virginia,
small business is defined as "a business entity, including its affiliates,
that (i) is independently owned and operated and (ii) employs fewer than 500
full-time employees or has gross annual sales of less than $6 million."
Costs and Other Effects. No small businesses are likely to
incur any additional costs on account of these proposed regulatory changes.
Alternative Method that Minimizes Adverse Impact. No small
businesses are likely to incur any additional costs on account of these
proposed regulatory changes.
Adverse Impacts:
Businesses. No businesses are likely to incur any additional costs
on account of these proposed regulatory changes.
Localities. Localities in the Commonwealth are unlikely to see
any adverse impacts on account of these proposed regulatory changes.
Other Entities. No other entities are likely to be adversely
affected by these proposed changes.
_________________________________________________
1http://lis.virginia.gov/cgi-bin/legp604.exe?171+ful+CHAP0762.
2Individuals and corporate entities that make qualifying
investments will be able to take advantage of the income subtractions allowed
for as many years as they hold the qualifying investment so qualifying taxable
income subtractions will likely continue past 2023.
3The Department will be using the same certification
process that it currently uses for qualified equity tax credits.
Agency's Response to Economic Impact Analysis: The
Department of Taxation agrees with the Department of Planning and Budget's
economic impact analysis regarding this action.
Summary:
Pursuant to Chapter 762 of the 2017 Acts of Assembly, which
establishes individual and corporate income tax subtractions for income
attributable to an investment in a Virginia venture capital account, the regulatory
action establishes procedures regarding the process an investment fund must use
to apply for certification as a Virginia venture capital account and provides
definitions of terms essential to understanding the certification process.
23VAC10-110-145. Subtraction for income attributable to an
investment in a Virginia venture capital account.
A. To the extent included in federal adjusted gross
income, any income, including investment services partnership interest income,
attributable to an investment made in a Virginia venture capital account on or
after January 1, 2018, but before December 31, 2023, shall be subtracted from
federal adjusted gross income in determining Virginia taxable income. If such
income was partially excluded or deducted in determining federal adjusted gross
income, it shall be subtracted from federal adjusted gross income only to the
extent included therein. If such income has already been excluded from Virginia
taxable income, it shall not be subtracted again pursuant to this section.
B. The following words and terms when used for purposes of
this section shall have the following meanings, unless the context clearly
indicates otherwise:
"Affiliated" means a direct or indirect
ownership interest of at least 80% in an entity. An indirect ownership interest
includes direct ownership interests held by a taxpayer's family members or an
entity affiliated with such taxpayer or family members, or any combination of
these.
"Department" means the Virginia Department of
Taxation.
"Family member" means, when applied with respect
to an individual taxpayer, (i) spouse, (ii) children, (iii) grandchildren, (iv)
parents, (v) spouse's parents, and (vi) grandparents.
"Investment services partnership interest
income" means income from an investment partnership treated as carried
interest income for federal income tax purposes.
"Professional experience" means full-time
employment involving venture capital investment.
"Qualified portfolio company" means the same as
that term is defined in subdivision 27 of § 58.1-322.02 of the Code of Virginia.
"Substantially equivalent experience" means an
undergraduate degree from an accredited college or university in economics,
finance, or a similar field of study or a combination of professional
experience totaling less than four years, professional training, and
undergraduate education from an accredited college or university in economics,
finance, or a similar field of study demonstrating competency in venture
capital investing.
"Virginia venture capital account" means the
same as that term is defined in subdivision 27 of § 58.1-322.02 of the
Code of Virginia.
C. The subtraction may not be claimed for an investment in
a company that is owned or operated by a family member or an affiliate of the
individual. The subtraction may not be claimed for an investment that was used
to claim the subtraction for certain long-term capital gains allowed pursuant
to subdivision 24 of § 58.1-322.02 of the Code of Virginia, or the qualified
equity and subordinated debt investments tax credit allowed pursuant to § 58.1-339.4
of the Code of Virginia.
D. 1. Every investment fund desiring to be certified by
the department as a Virginia venture capital account for purposes of this
subtraction must first register with the department by submitting an
application indicating that it intends to invest at least 50% of the capital
committed to its fund in qualified portfolio companies and currently employs at
least one investor who has at least four years of professional experience in
venture capital investment or substantially equivalent experience.
2. Each investment fund must include with its registration
application documentation of the investor's work experience, training, and
education adequately demonstrating that such individual meets the professional
experience or substantially equivalent experience requirement. Such
documentation may include proof of employment, certifications, and transcripts.
3. The registration application required by this subsection
must be submitted before or at the time the application required by subsection
E of this section is submitted.
4. Once the department determines that an investment fund
intends to invest at least 50% of the capital committed to its fund in
qualified portfolio companies, has at least one investor who has at least four
years of professional experience in venture capital investment or substantially
equivalent experience, and has submitted the required attachments, it will
provide certification to the investment fund stating that the registration
application has been approved. Such certification shall be valid only for the
calendar year for which it was issued. An investment fund may reapply for
certification each calendar year.
E. 1. An investment fund that has invested at least 50% of
the capital committed to its fund in qualified portfolio companies may then submit
an application for certification as a Virginia venture capital account.
2. Each investment fund must include with its application
documentation that it has invested at least 50% of the capital committed to its
fund in qualified portfolio companies.
3. To receive certification for this subtraction, each
investment fund may be required to submit certain information regarding its
investors as required by the department.
4. Once the department determines that an investment fund
has actually invested at least 50% of the capital committed to its fund in
qualified portfolio companies and has submitted the required attachments, it
will provide certification to the investment fund stating that it is a Virginia
venture capital account for purposes of this subtraction. Such certification
shall be valid only for the calendar year for which it was issued.
F. The applications in subsections D and E of this section
and any necessary attachments must be made on the form prescribed by the
department, postmarked no later than January 31 of the calendar year following
the calendar year in which the investment fund is applying for certification as
a Virginia venture capital account.
NOTICE: The following
forms used in administering the regulation were filed by the agency. The forms
are not being published; however, online users of this issue of the Virginia
Register of Regulations may click on the name of a form with a hyperlink to
access it. The forms are also available from the agency contact or may be
viewed at the Office of the Registrar of Regulations, 900 East Main Street,
11th Floor, Richmond, Virginia 23219.
FORMS (23VAC10-110)
Virginia Consumers Use Tax Return for Individuals, Form CU-7
(eff. 9/1993).
Virginia Individual Resident Income Tax Return (Booklet -
Instructions for Form 760 and 760S), Form 760 and 760S.
Underpayment of Estimated Tax by Individuals, Estates and
Trusts, Form 760 C.
Virginia Tentative Tax Return an Application for Extension of
Time to File Individual or Fiduciary Income Tax Return, Form 760E (eff. 8/1993).
Virginia Estimated Individual Income Tax Declaration and
Forms for Individuals, Estates and Trusts (Booklet - Instructions for Form
760ES), Form 760ES.
Underpayment of Estimated Tax by Farmers and Fishermen, Form
760F.
Virginia Part-Year Resident Individual Income Tax Return
(Booklet - Instructions for Form 760PY), Form 760PY.
Short Individual Resident Income Tax Return (Booklet -
Instructions for Form 760 and 760S), Form 760S.
Virginia Nonresident Individual Income Tax Return (Booklet -
Instructions for Form 763), Form 763.
Virginia Special Nonresident Claim for Individual Income Tax
Withheld, Form 763-S.
Credit Computation Schedule, Schedule CR, Form 760.
Schedule for Computing the Age Deduction for Taxpayers 62 and
Over, Out-of-State Tax Credit or State of Residence and the Addition to Tax,
Penalty and Interest, Schedule NPY, Forms 760PY and 763.
Enterprise Zone Credit, Form 301 (eff. 9/1992).
Computation of ACRS Subtraction, Form 302 (eff. 8/1992).
Application for Designation as a Qualified Business for the
Qualified Equity and Subordinated Debt Investments Tax Credit, Form QBA,
2601695, with instructions (eff. 1/2001).
Taxpayer Application for Qualified Equity and Subordinated
Debt Investments Tax Credit, Form EDC, 2601154, with instructions (eff. 7/2000).
Instructions
for Virginia Venture Capital Account Investment Fund Registration and
Certification Forms (rev. 2/2018)
Venture
Capital Account Investment Fund Registration Application, Form VEN-1 (rev.
1/2018)
Venture
Capital Account Investment Fund Confirmation Application, Form VEN-2
(rev.1/2018)
Venture
Capital Account Investment Fund Investor Information Report, Form VEN-3 (rev.
2/2018 )
23VAC10-120-103. Subtraction for income attributable to an
investment in a Virginia venture capital account.
A. To the extent included in federal taxable income, any
income, including investment services partnership interest income, attributable
to an investment made in a Virginia venture capital account on or after January
1, 2018, but before December 31, 2023, shall be subtracted from federal taxable
income in determining Virginia taxable income. If such income was partially
excluded or deducted in determining federal taxable income, it shall be
subtracted from federal taxable income only to the extent included therein. If
such income has already been excluded from Virginia taxable income, it shall
not be subtracted again pursuant to this section.
B. The following words and terms when used for purposes of
this section shall have the following meanings, unless the context clearly
indicates otherwise:
"Affiliated" means a direct or indirect
ownership interest of at least 80% in an entity. An indirect ownership interest
includes direct ownership interests held by a taxpayer's family members or an
entity affiliated with such taxpayer or family members, or any combination of
these.
"Department" means the Virginia Department of
Taxation.
"Investment services partnership interest
income" means income from an investment partnership treated as carried
interest income for federal income tax purposes.
"Professional experience" means full-time
employment involving venture capital investment.
"Qualified portfolio company" means the same as
that term is defined in subdivision C 25 of § 58.1-402 of the Code of
Virginia.
"Substantially equivalent experience" means an
undergraduate degree from an accredited college or university in economics,
finance, or a similar field of study or a combination of professional
experience totaling less than four years, professional training, and
undergraduate education from an accredited college or university in economics,
finance, or a similar field of study demonstrating competency in venture
capital investing.
"Virginia venture capital account" means the same
as that term is defined in subdivision C 25 of § 58.1-402 of the Code of
Virginia.
C. The subtraction may not be claimed for an investment in
a company that is owned or operated by an affiliate of the corporation. The
subtraction may not be claimed for an investment that was used to claim the
subtraction for certain long-term capital gains allowed pursuant to subdivision
C 24 of § 58.1-402 of the Code of Virginia.
D. 1. Every investment fund desiring to be certified by
the department as a Virginia venture capital account for purposes of this
subtraction must first register with the department by submitting an
application indicating that it intends to invest at least 50% of the capital
committed to its fund in qualified portfolio companies and currently employs at
least one investor who has at least four years of professional experience in
venture capital investment or substantially equivalent experience.
2. Each investment fund must include with its registration
application documentation of the investor's work experience, training, and
education adequately demonstrating that such individual meets the professional
experience or substantially equivalent experience requirement. Such
documentation may include proof of employment, certifications, and transcripts.
3. The registration application required by this subsection
must be submitted before or at the time the application required by subsection
E of this section is submitted.
4. Once the department determines that an investment fund
intends to invest at least 50% of the capital committed to its fund in
qualified portfolio companies, has at least one investor who has at least four
years of professional experience in venture capital investment or substantially
equivalent experience, and has submitted the required attachments, it will
provide certification to the investment fund stating that the registration
application has been approved. Such certification shall be valid only for the
calendar year for which it was issued. An investment fund may reapply for certification
each calendar year.
E. 1. An investment fund
that has invested at least 50% of the capital committed to its fund in
qualified portfolio companies may then submit an application for certification
as a Virginia venture capital account.
2. Each investment fund must include with its application
documentation that it has invested at least 50% of the capital committed to its
fund in qualified portfolio companies.
3. To receive certification for this subtraction, each
investment fund may be required to submit certain information regarding its
investors as required by the department.
4. Once the department determines that an investment fund
has actually invested at least 50% of the capital committed to its fund in
qualified portfolio companies and has submitted the required attachments, it
will provide certification to the investment fund stating that it is a Virginia
venture capital account for purposes of this subtraction. Such certification
shall be valid only for the calendar year for which it was issued.
F. The applications in subsections D and E of this section
and any necessary attachments must be made on the form prescribed by the
department, postmarked no later than January 31 of the calendar year following
the calendar year in which the investment fund is applying for certification as
a Virginia venture capital account.
NOTICE: The following
forms used in administering the regulation were filed by the agency. The forms
are not being published; however, online users of this issue of the Virginia
Register of Regulations may click on the name of a form with a hyperlink to
access it. The forms are also available from the agency contact or may be
viewed at the Office of the Registrar of Regulations, 900 East Main Street,
11th Floor, Richmond, Virginia 23219.
FORMS (23VAC10-120)
Virginia Corporation Income Tax Return (Booklet-Instructions
for Form 500), Form 500 (eff. 9/1993).
Schedule A-Multistate Corporation-Allocation and
Apportionment of Income.
Underpayment of Virginia Estimated Tax by Corporations, Form
500C.
Application for Extension of Time, Form 500E (eff. 9/1993).
Declaration of Estimated Income Tax for Corporations, Form
500V (eff. 9/1993).
Virginia Corporation Income Tax Extension Payment Voucher,
Form 500EV (eff. 9/1993).
Corporation Application for Refund, Form 500-NOLD (eff. 9/1993).
Virginia Small Business Corporation Return of Income, Form
500-S (eff. 9/1993).
Telecommunications Companies Minimum Tax and Credit Schedule
(Instructions for Form 500T), Form 500-T (eff. 2/1992).
Corporation Income Tax Voucher.
Amended Virginia Corporation Income Tax Return, Form 500X
(eff. 9/1993).
Combined Registration Application, Form R-1 (eff. 10/1989).
Instructions for Completing Combined Registration, Form R-4
(eff. 10/1989).
Instructions
for Virginia Venture Capital Account Investment Fund Registration and
Certification Forms (rev. 2/2018)
Venture
Capital Account Investment Fund Registration Application, Form VEN-1 (rev.
1/2018)
Venture
Capital Account Investment Fund Confirmation Application, Form VEN-2 (rev.
1/2018)
Venture
Capital Account Investment Fund Investor Information Report, Form VEN-3 (rev.
2/2018)
VA.R. Doc. No. R18-5338; Filed July 26, 2018, 11:20 a.m.