1.1 	A bill for an act
1.2 	relating to taxation; corporate franchise; modifying
1.3 	the definition of foreign operating corporations;
1.4 	amending Minnesota Statutes 2004, sections 290.01,
1.5 	subdivision 6b; 290.17, by adding a subdivision.
1.6 	BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

1.7 	Section 1. Minnesota Statutes 2004, section 290.01,
1.8 	subdivision 6b, is amended to read:
1.9 		Subd. 6b.Foreign operating corporation.  The term
1.10 	"foreign operating corporation," when applied to a corporation,
1.11 	means a domestic corporation with the following characteristics:
1.12 	(1) it is part of a unitary business at least one member of
1.13 	which is taxable in this state;
1.14 	(2) it is not a foreign sales corporation under section 922
1.15 	of the Internal Revenue Code, as amended through December 31,
1.16 	1999, for the taxable year; and 
1.17 	(3) either (i) the average of the percentages of its
1.18 	property and payrolls, including the pro rata share of its
1.19 	unitary partnerships' property and payroll,assigned to
1.20 	locations inside outside the United States and the District of
1.21 	Columbia, excluding the commonwealth of Puerto Rico and
1.22 	possessions of the United States, where the United States
1.23 	includes the District of Columbia and excludes the possessions
1.24 	of the United States,as determined under section 290.191 or
1.25 	290.20, is 20 80 percent or less more; or (ii) it has in effect
2.1 	a valid election under section 936 of the Internal Revenue Code;
2.2 	and 
2.3 	(4) it has $1,000,000 of payroll and $2,000,000 of
2.4 	property, as determined under section 290.191 or 290.20, that
2.5 	are located outside of the United States.  If the domestic
2.6 	corporation does not have payroll as determined under section
2.7 	290.191 or 290.20, but it or its partnerships have paid
2.8 	$1,000,000 for work, performed directly for the domestic
2.9 	corporation or the partnerships, outside of the United States,
2.10 	then paragraph (3)(i) does not require payrolls to be included
2.11 	in the average calculation.
2.12 	
EFFECTIVE DATE. This section is effective for taxable
2.13 	years beginning after December 31, 2004.

2.14 	Sec. 2. Minnesota Statutes 2002, section 290.17, is
2.15 	amended by adding a subdivision to read:
2.16 		Subd. 8.Foreign operating corporations; commissioner's
2.17 	authority. (a) This subdivision applies to a unitary business
2.18 	that includes a foreign operating corporation.
2.19 	(b) The commissioner may disqualify a corporation as a
2.20 	foreign operating corporation, if the commissioner finds that:
2.21 	(1) there was no substantial independent business purpose,
2.22 	other than the reduction of tax, for establishment of the
2.23 	foreign operating corporation;
2.24 	(2) the income of the foreign operating corporation, on a
2.25 	multiyear basis, is primarily derived from or fairly
2.26 	attributable to domestic operations or sources of the unitary
2.27 	business; or 
2.28 	(3) a significant amount of inter-company transactions
2.29 	involving the foreign operating corporation lack economic
2.30 	substance or do not reflect market prices.
2.31 	(c) The commissioner may disallow all or part of the
2.32 	subtraction for royalties, fees, and like income under section
2.33 	290.01, subdivision 19d, clause (10), or all or part of the
2.34 	deduction for deemed dividends of the foreign operating
2.35 	corporation under section 290.21, if the commissioner finds that
2.36 	the income or transactions on which the deductions are based:
3.1 	(1) lack economic substance or fail to reflect market
3.2 	prices;
3.3 	(2) have no substantial independent business purpose other
3.4 	than the reduction of tax; or 
3.5 	(3) are derived from or fairly attributable to domestic
3.6 	operations or sources.
3.7 	
EFFECTIVE DATE. This section is effective July 1, 2005.