House Bill 25b-1002 Engrossed

A Bill for an Act

• Page 1, Line 101Concerning corporate income taxation related to foreign

• Page 1, Line 102jurisdictions.

Bill Summary

(Note: This summary applies to this bill as introduced and does not reflect any amendments that may be subsequently adopted. If this bill passes third reading in the house of introduction, a bill summary that applies to the reengrossed version of this bill will be available at http://leg.colorado.gov.)

Current law lists certain foreign jurisdictions in which a C corporation is presumptively incorporated for the purpose of avoiding state corporate income tax and allows a C corporation to rebut that presumption by proving to the satisfaction of the executive director of the department of revenue (executive director) that the C corporation is incorporated in the listed foreign jurisdiction for reasons that meet the economic substance doctrine described in the federal internal revenue code. The bill permits the executive director to, without proof from the C corporation, use discretion to determine that a C corporation is not incorporated in a foreign jurisdiction for the purpose of tax avoidance. The bill adds Hong Kong, Ireland, Liechtenstein, Netherlands, and Singapore to the list of foreign jurisdictions in which a C corporation is presumptively incorporated for the purpose of avoiding state corporate income tax.

  For income tax years commencing on or after January 1, 2026, for the purposes of determining the amount of corporate income tax that a C corporation owes to the state, the bill adds to a C corporation's federal taxable income an amount equal to a federal deduction claimed for the income tax year for foreign-derived deduction eligible income that was allowed under the federal internal revenue code.

Current law provides that dividends from foreign subsidiaries that must be added to a C corporation's federal taxable income under the federal internal revenue code may be subtracted from the C corporation's federal taxable income for the purposes of determining the amount of corporate income tax that a C corporation owes to the state; except that

such dividends received from a C corporation incorporated in a foreign jurisdiction for the purpose of tax avoidance cannot be subtracted. The bill changes this subtraction so that all dividends from foreign subsidiaries that must be added to a C corporation's federal taxable income under the federal internal revenue code may be subtracted from the C corporation's federal taxable income for the purposes of determining the amount of corporate income tax that a C corporation owes to the state.

• Page 2, Line 1Be it enacted by the General Assembly of the State of Colorado:

• Page 2, Line 2SECTION 1.  Legislative declaration. (1)  The general assembly finds and declares that:

• Page 2, Line 3(a) (I)  The purpose of defining listed jurisdictions for purposes of

• Page 2, Line 4corporate income tax is to decrease corporate income tax avoidance in Colorado. This is a continuation of existing tax policy.

• Page 2, Line 5(II)  Additional foreign jurisdictions must be included in the

• Page 2, Line 6current list to accurately reflect the foreign jurisdictions that are used by C corporations for the purpose of tax avoidance.

• Page 2, Line 7(III)  The clarification of listed jurisdictions will decrease tax

• Page 3, Line 1avoidance by creating a more accurate list of foreign jurisdictions used by C corporations for the purpose of tax avoidance.

• Page 3, Line 2(b) (I)  In 2017, as part of the federal "Tax Cuts and Jobs Act",

• Page 3, Line 3Pub.L. 115-97, Congress created the Foreign-Derived Intangible Income

• Page 3, Line 4("FDII") tax deduction. Federal Public Law 119-21 lowered the rate for

• Page 3, Line 5the FDII deduction and renamed it the foreign-derived deduction eligible

• Page 3, Line 6income ("FDDEI") tax deduction for taxable years beginning after December 31, 2025.

• Page 3, Line 7(II)  The FDDEI deduction provides a tax benefit to corporations

• Page 3, Line 8that do business outside of the United States. Such corporations also

• Page 3, Line 9receive other substantial tax reductions from other Colorado tax laws. In

• Page 3, Line 10addition, most FDDEI deductions claimed for state income tax purposes

• Page 3, Line 11are claimed by corporations that maintain the majority of their property and investments outside of Colorado.

• Page 3, Line 12(III)  The primary purpose of adding the FDDEI deduction back to

• Page 3, Line 13taxable income for state income tax purposes is to encourage tax

• Page 3, Line 14compliance by promoting tax simplicity, equalization, and fairness. The

• Page 3, Line 15revenue gain from this add-back is incidental to the primary purpose of

• Page 3, Line 16encouraging tax compliance and promoting tax simplicity, equalization, and fairness for Colorado taxpayers.

• Page 3, Line 17(IV)  Any revenue gain resulting from the FDDEI deduction add-back is de minimis.

• Page 3, Line 18(c)  Therefore, consistent with the Colorado supreme court's

• Page 3, Line 19holding in TABOR Found. v. Reg'l Transp. Dist., 2018 CO 29, that

• Page 3, Line 20legislation that causes only an incidental and de minimis tax revenue

• Page 3, Line 21increase does not amount to a new tax or a tax policy change that requires

• Page 3, Line 22advance voter approval under section 20 of article X of the Colorado

• Page 4, Line 1constitution, the FDDEI deduction add-back is neither a new tax nor a tax policy change that requires voter approval.

• Page 4, Line 2SECTION 2.  In Colorado Revised Statutes, 39-22-303, amend (8)(b)(II) and (12)(b) as follows:

• Page 4, Line 339-22-303.  Dividends in a combined report - foreign source

• Page 4, Line 4income - affiliated groups - definitions - rules - repeal. (8) (b) (II)  A

• Page 4, Line 5C corporation is presumptively incorporated in a foreign jurisdiction for

• Page 4, Line 6the purpose of tax avoidance if it is incorporated in a listed jurisdiction.

• Page 4, Line 7A C corporation is not incorporated in a foreign jurisdiction for the

• Page 4, Line 8purpose of tax avoidance if the taxpayer proves to the satisfaction of the

• Page 4, Line 9executive director, or if the executive director determines, that such

• Page 4, Line 10corporation is incorporated in a listed jurisdiction for reasons that meet

• Page 4, Line 11the economic substance doctrine described in section 7701 (o) of the internal revenue code.

• Page 4, Line 12(12)  As used in this section, unless the context otherwise requires:

• (b)  "Listed jurisdiction" means:

• Page 4, Line 13(I)  For income tax years commencing before January 1,

• Page 4, Line 142026, Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas,

• Page 4, Line 15Bahrain, Barbados, Belize, Bermuda, Bonaire, British Virgin Islands,

• Page 4, Line 16Cayman Islands, Cook Islands, Curaçao, Cyprus, Dominica, Gibraltar,

• Page 4, Line 17Grenada, Guernsey-Sark-Alderney, Isle of Man, Jersey, Liberia,

• Page 4, Line 18Luxembourg, Malta, Marshall Islands, Mauritius, Monaco, Montserrat,

• Page 4, Line 19Nauru, Niue, Panama, Saba, Samoa, San Marino, Seychelles, Sint

• Page 4, Line 20Eustatius, Sint Maarten, St. Kitts and Nevis, St. Lucia, St. Vincent and the

• Page 4, Line 21Grenadines, Turks and Caicos Islands, U.S. Virgin Islands, and Vanuatu; and

• Page 4, Line 22(II)  For income tax years commencing on or after January

• Page 5, Line 11, 2026, the jurisdictions listed in subsection (12)(b)(I) of this

• Page 5, Line 2section and Hong Kong, Republic of Ireland, Liechtenstein, Netherlands, and Singapore.

• Page 5, Line 3SECTION 3.  In Colorado Revised Statutes, 39-22-304, amend (3)(j) and (3)(q)(II); and add (2)(l) as follows:

• Page 5, Line 439-22-304.  Net income of corporation - legislative declaration - definitions - repeal. (2)  There shall be added to federal taxable income:

• Page 5, Line 5(l)  For income tax years commencing on or after January

• Page 5, Line 61, 2026, an amount equal to a federal deduction claimed for the

• Page 5, Line 7income tax year for foreign-derived deduction eligible income pursuant to section 250 of the internal revenue code.

• Page 5, Line 8(3)  There shall be subtracted from federal taxable income:

• Page 5, Line 9(j)  Any amount treated as a section 78 dividend under section 78

• Page 5, Line 10of the internal revenue code; excluding any amount treated under section

• Page 5, Line 1178 as a dividend received from a C corporation incorporated in a foreign

• Page 5, Line 12jurisdiction for the purpose of tax avoidance pursuant to section 39-22-303 (8)(b)(II)

• Page 5, Line 13(q) (II)  The amount of any global intangible low-taxed income

• Page 5, Line 14included in federal taxable income pursuant to section 951A (a) of the

• Page 5, Line 15internal revenue code with respect to a controlled foreign corporation that

• Page 5, Line 16is a C corporation incorporated in a foreign jurisdiction for the purpose

• Page 5, Line 17of tax avoidance pursuant to section 39-22-303 (8)(b)(II), less any amount

• Page 5, Line 18deducted under section 250 (a)(1)(B) of the internal revenue code with respect to such global intangible low-taxed income.

• Page 5, Line 19SECTION 4.  Safety clause. The general assembly finds,

• Page 5, Line 20determines, and declares that this act is necessary for the immediate

• Page 5, Line 21preservation of the public peace, health, or safety or for appropriations for

• Page 6, Line 1the support and maintenance of the departments of the state and state institutions.