to top

Division of Taxation

Income Excluded Pursuant to a Tax Treaty and CBT Returns

The Division published proposed rules addressing various matters pertaining to the 2018 through 2020 law changes to the Corporation Business Tax Act in the May 16, 2022 New Jersey Register at 54 N.J.R. 865(a). Those rules were finalized in the Monday September 19, 2022 New Jersey Register at 54 N.J.R. 1819(a). Among those rules are clarifications on the exclusion of income that was exempt from federal taxation pursuant to a treaty with a foreign nation, which are in line with Infosys Limited of India Inc. v. Director, Div. of Taxation, No. 012060-2016 (N.J. Tax Ct. March 19, 2018).

Although N.J.S.A. 54:10A-4(k)(2)(A) was amended to delete the word "specific," the 2018 through 2020 law changes did not address the treatment of treaty excluded income. The laws only covered treaties in connection with the related party addback statutes.

For taxpayers filing on a separate company, water's-edge or affiliated group basis, income that was protected by a treaty is not required to be added back to entire net income for New Jersey Corporation Business Tax (CBT) purposes, except as may be required pursuant to other related party addback statutory provisions. For those CBT returns filed for privilege periods still within the statute of limitations, if a taxpayer added back this treaty exempted income, it may file an amended return.

For taxpayers filing on a world-wide group basis, the income from foreign corporations and foreign non-corporate entities is included in entire net income without regard to any treaty protections. The application of treaty protections to a world-wide group is contrary to the legislative intent in providing a world-wide election which was to tax the world-wide group on all of its global income regardless of whether or not the jurisdiction where the income is earned is subject to a tax treaty with the United States.

P.L. 2023, c. 96, signed into law on July 3, 2023, codified this treatment set forth above by statute. Non-U.S. corporations that are separate filers or members of water's-edge group or affiliated group, which are claiming treaty protection should attach Form 8833 that was attached to the federal return that they filed with the IRS. The Division will discuss the various details of the law changes in subsequent new publications or as updates to existing publications.

As a reminder, if a non-U.S. corporation, that is a separate filer, has nexus with New Jersey, but all of their income is treaty protected and the taxpayer does not have any effectively connected income, the taxpayer must still file a CBT return. However, in this situation the taxpayer would enter zero on Schedule A and would only be liable for the statutory minimum tax, as the taxpayer's income is treaty protected.

Last Updated: Thursday, 08/17/23