CHAPTER 2.04. Taxation

• Jurisdiction: United States

2.04. Taxation

Potential sources of tax liability arising for foreign lenders extending credit in Delaware can be found in Chapter 11 of Title 5 of the Delaware Code, Chapter 19 of Title 30 of the Delaware Code, and Chapter 23 of Title 30 of the Delaware Code.

[1] Net Operating Income Tax

Section 1101(a) of Chapter 11 imposes a franchise tax on the net operating income of "banking organizations." A "banking organization" is defined in relevant part as a "bank" or a "trust company" organized under Delaware law, or a "national bank, including a federal savings bank, with its principal office in [Delaware]."²²

[2] Income Tax

Chapter 19 of Title 30 of the Delaware Code imposes a state corporate income tax on income allocated to Delaware. This tax will apply to the income generated by business activities carried on and property located in Delaware.

There are certain exceptions to companies that are liable for Delaware corporate income taxes. These include, among others that are less applicable to commercial real estate finance:

• a corporation having in effect a valid election under Subchapter S of the United States Internal Revenue Code and doing business in Delaware that has any nonresident stockholders,²³ but the corporation is required to make estimated personal income tax payments to Delaware on behalf of such nonresident stockholders;²⁴
• an entity that is registered as an investment company under the federal Investment Company Act of 1940;²⁵
• an entity that qualifies under federal tax law as a real estate mortgage investment conduit;²⁶ and
• an entity that is a real estate investment trust.²⁷

[3] Gross Receipts Tax

The Delaware Code imposes a tax, described as a "license fee," as a percentage of the aggregate gross receipts "attributable to activities licensable under [Chapter 23]."²⁸ Section 2301(a) of Title 30 of the Delaware Code provides a list of activities requiring a license, including those activities requiring a Loan Agency License.²⁹ Section 2301(f), however, exempts activities governed by a Loan Agency License from the gross receipts tax or license fee. Although a foreign lender therefore might be able to avoid the gross receipts tax by obtaining a Loan Agency License, that result is not free from doubt because, as discussed above, it is uncertain whether the activities by a foreign lender in most circumstances require a Loan Agency License. Even if making the loans is not an activity that is licensable under Section 2301(a), it may...