SB303: (3rd New Title) relative to the strengthening the requirements for qualified investment company status and the resulting exemption from business taxes, and eliminating the tax-exempt status of qualified investment capital companies.

CHAPTER 143

SB 303-FN – FINAL VERSION

03/17/04 0732s

03/17/04 0828s

22Apr2004… 1228h

2004 SESSION

04-3260

04/09

SENATE BILL 303-FN

AN ACT relative to strengthening the requirements for qualified investment company status and the resulting exemption from business taxes, and eliminating the tax-exempt status of qualified investment capital companies.

SPONSORS: Sen. Eaton, Dist 10; Rep. Chandler, Carr 4

COMMITTEE: Finance

AMENDED ANALYSIS

This bill:

I. Establishes a procedure for a business organization to elect qualified investment company status.

II. Exempts business organizations that qualify for and have elected qualified investment companies from the business profits tax.

III. Eliminates the tax-exempt status of qualified investment capital companies

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Explanation: Matter added to current law appears in bold italics.

Matter removed from current law appears [in brackets and struckthrough.]

Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.

03/17/04 0732s

03/17/04 0828s

22Apr2004… 1228h

04-3260

04/09

STATE OF NEW HAMPSHIRE

In the Year of Our Lord Two Thousand Four

AN ACT relative to strengthening the requirements for qualified investment company status and the resulting exemption from business taxes, and eliminating the tax-exempt status of qualified investment capital companies.

Be it Enacted by the Senate and House of Representatives in General Court convened:

143:1 Taxation of Incomes; Who Taxable. Amend RSA 77:3, I (a) to read as follows:

(a) Individuals who are inhabitants or residents of this state for any part of the taxable year whose gross interest and dividend income from all sources, including income from a qualified investment company pursuant to RSA 77:4, V, exceeds $2,400 during that taxable period.

143:2 Business Profits Tax; Definition of Business Organization. Amend RSA 77-A:1, I to read as follows:

I. “Business organization” means any enterprise, whether corporation, partnership, limited liability company, proprietorship, association, business trust, real estate trust or other form of organization; organized for gain or profit, carrying on any business activity within the state, except such enterprises as are expressly made exempt from income taxation under the United States Internal Revenue Code as defined in RSA 77-A:1, XX. Each enterprise under this definition shall be subject to taxation under RSA 77-A:2 as a separate entity, unless specifically authorized by this chapter to be treated otherwise, such as, but not limited to, combined reporting. Trusts treated as grantor trusts under section 671 of the United States Internal Revenue Code shall be included in the return of their owners, and such owners shall be subject to the tax thereon to the extent such owners would be considered a business organization hereunder notwithstanding the existence of the trust. The use of consolidated returns as defined in the United States Internal Revenue Code as defined in RSA 77-A:1, XX is not permitted. Notwithstanding any other provision of this paragraph, an enterprise shall not be characterized as a business organization and shall be excluded from taxation at the entity level if it [is a] elects to be treated as a qualified investment company as defined in RSA 77-A:1, XXI [that is not taxable under RSA 77-A:2-c]. A partnership, limited liability company, estate, trust except grantor trusts pursuant to section 671 of the United States Internal Revenue Code, “S” corporation, real estate investment trust, or any other such entity, other than [a] an organization electing to be treated as a qualified investment company as defined in RSA 77-A:1, XXI [that is not taxable under RSA 77-A:2-c,] whose net income is reportable by the true owners either directly or indirectly shall be subject to tax at the entity level, and no part of such earnings or loss shall be included in the calculation of the gross business profits of the owners of such entity.

143:3 Business Profits Tax; Definition of Qualified Investment Company. Amend RSA 77-A:1, XXI to read as follows:

XXI.(a) “Qualified investment company” means:

(1) A regulated investment company as defined in section 851 of the United States Internal Revenue Code as defined in RSA 77-A:1, XX;

(2) An organization that is an investment company under the Investment Company Act of 1940 as amended; or

(3) An organization that would be an investment company under the Investment Company Act of 1940, as amended, but for the exception from investment company status provided by section 3(c)(1) or 3(c)(7) of said Investment Company Act[; or

(4) A qualified investment capital company as defined in RSA 77-A:1, XXIV].

(b) A qualified investment company shall limit its activities to investment or other activities consistent with its organizational purpose and those incidental to or in support of such activities [and shall submit certification that it satisfies the requirements to be classified as a qualified investment company to the commissioner no later than 9 months subsequent to commencement of its investment activities, and] provided [further] that any such exception from investment company status by reason of section 3(c)(7) is available only to issuers whose securities are owned by persons or organizations who are deemed under section 3(c)(7) or any order, regulation or interpretation thereunder not to require protection under the provisions of the Investment Company Act by reason of their size, nature, status, or sophistication. [Upon petition, the commissioner may accept an untimely submission of such certification, which acceptance shall not be unreasonably withheld.] A business organization seeking qualified investment company status shall file an election pursuant to RSA 77-A:5-b.

143:4 Business Profits Tax; Additions and Deductions. Amend RSA 77-A:4, XV to read as follows:

XV. In the case of a business organization that is a holder of an ownership interest in a qualified investment company as defined in RSA 77-A:1, XXI, an addition to gross business profits of an amount equal to the holder’s proportional share of profits of the qualified investment company, computed as if the qualified investment company were a business organization subject to tax under RSA 77-A. [Such a holder shall deduct from gross business profits that] No portion of any actual distributions made to such holder by such qualified investment company that would otherwise be part of taxable business profits shall be included in such holder’s gross business profits.

143:5 Election and Reporting for Qualified Investment Companies. RSA 77-A:5-b is repealed and reenacted to read as follows:

77-A:5-b Election and Reporting for Qualified Investment Companies.

I. Business organizations shall file an election with the commissioner to be a qualified investment company with respect to any taxable period on a form prescribed by the commissioner at any time on or before the fifteenth day of the third month of such taxable period. Such an election shall be effective for the taxable period of the qualified investment company for which it is made and for all succeeding taxable periods until such election is terminated as provided in this section.

II. Every business organization electing treatment as a qualified investment company shall, with respect to each taxable period, file a report, in accordance with such rules or forms as the commissioner may prescribe, setting forth the following:

(a) The aggregate amounts of funds invested in the qualified investment company.

(b) The names, addresses, and federal taxpayer identification numbers of the holders of such qualified investment company and the amount, if any, of their proportional share of the income required to be included in such holder’s New Hampshire tax return under RSA 77:4, V and RSA 77-A:4, XV.

(c) The name, address, and federal taxpayer identification number of the manager of such qualified investment company.

(d) The amount of the income received and expenses incurred by the qualified investment company for the tax period.

(e) Notwithstanding any other provision of this section, a qualified investment company shall be deemed to have satisfied the reporting requirements of this section if it files with the commissioner a copy of its federal income tax return, as filed with the Internal Revenue Service.

III. Such report or copy of the federal income tax return shall be filed at any time on or before 30 days following the filing of the federal income tax return with the Internal Revenue Service. Any qualified investment company which fails to timely file the report as required by this section shall pay a penalty equal to $100 for each day such report is not filed, unless an extension has been granted by the commissioner. In no event shall the monetary fine imposed by this paragraph exceed $5,000. A qualified investment company notified by the department that such report is overdue by more than 50 days shall have 30 days from the date of such notification to file the delinquent report. If the delinquent report is not filed within 30 days after notification, the commissioner shall disallow the business organization qualified investment company status for the tax periods for which a timely report is not filed.

IV. The qualified investment company shall be subject to the provisions of RSA 77-A:11 and RSA 77-E:10. The commissioner is authorized to audit and enforce such provisions with any of the powers granted under this chapter and RSA 77-E.

V. The election provided for in paragraph I may be terminated as follows:

(a) By revoking said election by consent of the majority of the members, partners, or shareholders of the qualified investment company, or by determination of the manager of the qualified investment company. Such revocation must be filed with the department on or before the fifteenth day of the third month of the taxable period to be effective for such period. Any revocation filed after the fifteenth day of the third month of the taxable period shall be effective for the following tax period; or

(b) Whenever the company ceases to satisfy the requirements for qualification as a qualified investment company as provided in RSA 77-A:1, XXI.

143:6 Business Enterprise Tax; Definition of Qualified Investment Company. Amend RSA 77-E:1, XIV to read as follows:

XIV.(a) “Qualified investment company” means:

(1) A regulated investment company as defined in section 851 of the United States Internal Revenue Code as defined in RSA 77-E:1, XVII;

(2) An organization that is an investment company under the Investment Company Act of 1940, as amended; or

(3) An organization that would be an investment company under the Investment Company Act of 1940, as amended, but for the exception from investment company status provided by section 3(c)(1) or 3(c)(7) of said Investment Company Act[; or

(4) A qualified investment capital company as defined in RSA 77-A:1, XXIV].

(b) A qualified investment company shall limit its activities to investment or other activities consistent with its organizational purpose and those incidental to or in support of such activities [and shall submit certification that it satisfies the requirements to be classified as a qualified investment company to the commissioner no later than 9 months subsequent to commencement of its investment activities, and] provided [further] that any such exception from investment company status by reason of section 3(c)(7) is available only to issuers whose securities are owned by persons or organizations who are deemed under section 3(c)(7) or any order, regulation or interpretation thereunder not to require protection under the provisions of the Investment Company Act by reason of their size, nature, status, or sophistication. [Upon petition, the commissioner may accept an untimely submission of such certification, which acceptance shall not be unreasonably withheld.] A business organization seeking qualified investment company status shall file an election pursuant to RSA 77-A:5-b.

143:7 New Section; Business Enterprise Tax; Election of Qualified Investment Company Status. Amend RSA 77-E by inserting after section 5 the following new section:

77-E:5-a Election of Qualified Investment Company Status. Business organizations that have elected qualified investment company status pursuant to RSA 77-A:5-b shall be qualified investment companies for the purposes of this chapter for the tax period or periods corresponding to the election.

143:8 Repeal. The following are repealed:

I. RSA 77:4, VI, relative to interest and dividend taxation of qualified investment capital company income.

II. RSA 77:4-f, relative to adjustments for contributions and distributions with respect to qualified investment capital companies.

III. RSA 77-A:1, XXIV and XXV, relative to the definitions of “qualified investment capital company” and “investment company manager” for the purposes of the business profits tax.

IV. RSA 77-A:4, XVII and XVIII, relative to additions and deductions for qualified investment capital companies concerning the business profits tax.

143:9 Transition Provisions. The provisions of RSA 77:4, VI, RSA 77:4-f, II, RSA 77-A:1, XXI (a)(4), RSA 77-A:1, XXIV and XXV, RSA 77-A:4, XVIII, RSA 77-A:5-b, and RSA 77-E:1, XIV(a)(4) shall remain in effect as enacted prior to the effective date of this act for companies that qualified for qualified investment capital company status and submitted a valid election therefor prior to the effective date of this act.

143:10 Effective Date. This act shall take effect upon its passage.

(Approved: May 24, 2004)

(Effective Date: May 24, 2004)