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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.

The Division will update the return instructions for the subsequent tax years as the 2018 through 2021 returns have already been filed.