Since 1889, Pennsylvania has imposed a tax on Pennsylvania residents who make loans to corporations and other entities taxed as a corporation, if the entity is active within Pennsylvania and has a treasurer who performs duties within Pennsylvania. For example, the tax applies to shareholders who loan start-up capital to a corporation or sell their stock in a closely held corporation to the corporation. The annual tax rate is 4 mills on the amount owed by the corporation.
While the Corporate Loan Tax is technically imposed on the individuals making such loans, corporations have historically shouldered the economic burden of this tax.
The corporation is responsible for deducting the tax from interest paid on the loan, and remitting the tax to the Pennsylvania Department of Revenue. The corporation, not the individual, is responsible for penalties and interest if the tax is not paid. However, corporations have often agreed with the holder of the debt to pay the tax out of corporate funds, rather than withhold it from interest to be paid.
The tax was archaic and unusual in many respects. Critics of the tax have claimed that the tax stifled Pennsylvania business development, placed an unreasonable burden on small businesses that depend on shareholder loans, and unfairly penalized Pennsylvania residents because the tax did not apply to loans made by non-Pennsylvania residents.
In February 2013, Governor Corbett announced his intent to repeal the Corporate Loan Tax as part of Pennsylvania’s 2013 – 2014 budget.
Act 71, signed by Governor Corbett on July 18, 2013, repeals the Corporate Loan Tax effective January 1, 2014.
If you have any questions about how the repeal of the Corporate Loan Tax affects your business, please do not hesitate to contact us.
If you have any questions regarding any business law matter, including the issues discussed in this newsletter, please do not hesitate to contact us at 717/392-1100, or email us at the following addresses:
KEGEL KELIN ALMY & LORD LLP
Corporate and Business Law Group
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