Proposed Pennsylvania Legislation Would Close Delaware Loophole

Legislation has recently been introduced that would make significant changes to the Pennsylvania corporate net income tax.  If enacted, House Bill 2150, would generally close the so-called “Delaware loophole.”  The proposal would generally prevent corporations from deducting royalties or interest paid to an affiliate if the affiliate is located in a tax haven-type state such as Delaware.  An exception is provided for transactions that are directly related to a valid business purpose.

The Pennsylvania legislature has previously considered various proposals for closing the “Delaware loophole.”  Unlike most of the prior proposals, however, House Bill 2150 also includes changes that are strongly supported by the Pennsylvania business community.  These changes include:

  • Reducing the corporate income tax rate from 9.99% to 6.9% by 2019
  • Eliminating limitations on NOL deductions by 2022
  • Adopting a single sales factor for apportionment purposes

It’s too early to assess the likelihood of enactment, but it appears that this bill has broader support than earlier attempts to close the “Delaware loophole.”  Expect additional changes as the bill proceeds through the legislative process.

Jeffry M. Kessel chairs the firm’s state and local tax group and is able to discuss any questions you may have concerning the proposed legislation or state and local tax matters generally.

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