C.R.S. § 39-22-303: Dividends in a combined report - foreign source income - affiliated groups - definitions - rules - repeal.

(1) to (5) (Deleted by amendment, L. 2008, p. 955, § 7, effective January 1, 2009.)

(6) In the case of two or more C corporations, whether domestic or foreign, owned or controlled directly or indirectly by the same interests, the executive director may, to avoid abuse, on a fair and impartial basis, distribute or allocate the gross income and deductions between or among such C corporations in order to clearly reflect income.

(7) (Deleted by amendment, L. 2008, p. 955, § 7, effective January 1, 2009.)

(8) (a) Except as provided in subsection (8)(b) of this section, for tax years beginning before January 1, 2027, neither the taxpayer nor the executive director shall include in a combined report any C corporation that conducts business outside the United States if eighty percent or more of the C corporation's property and payroll, as determined by factoring pursuant to section 24-60-1301, is assigned to locations outside the United States. For the purpose of this subsection (8), "United States" is restricted to the fifty states and the District of Columbia.

(b) (I) For tax years beginning on or after January 1, 2022, but before January 1, 2027, a taxpayer shall include in the combined group any member of an affiliated group of C corporations that is incorporated in a foreign jurisdiction for the purpose of tax avoidance.

(II) A C corporation is presumptively incorporated in a foreign jurisdiction for the purpose of tax avoidance if it is incorporated in a listed jurisdiction. A C corporation is not incorporated in a foreign jurisdiction for the purpose of tax avoidance if the taxpayer proves to the satisfaction of the executive director, or if the executive director determines, that such corporation is incorporated in a listed jurisdiction for reasons that meet the economic substance doctrine described in section 7701 (o) of the internal revenue code.

(III) For purposes of this subsection (8)(b), the term "C corporation" includes any business entity defined as a "corporation" under the internal revenue code and the rules and regulations promulgated pursuant thereto, regardless of whether such entity is subject to federal income tax. Any business entity included in a combined group under subsection (8)(b)(I) of this section is deemed to be a "C corporation" for purposes of this article 22, notwithstanding section 39-22-103 (2.5).

(c) This subsection (8) is repealed, effective December 31, 2031.

(8.5) (a) For income tax years beginning on or after January 1, 2027, the members of an affiliated group of C corporations required to file a combined report pursuant to subsection (11.5)(b)(I) of this section may make a water's-edge election as set forth in subsection (8.5)(c) of this section. Pursuant to a water's-edge election, the combined group shall take into account the net income and apportionment factors of the members of the affiliated group pursuant to subsection (11.5) of this section to the extent set forth in subsection (8.5)(b) of this section.

(b) (I) The combined group shall take into account the entire net income and apportionment factors of:

(A) Every member of the affiliated group that is incorporated in the United States or formed under the laws of any state, the District of Columbia, or any territory or possession of the United States;

(B) Every member of the affiliated group, regardless of the place where the member was incorporated or formed, if twenty percent or more of the member's property and payroll, as determined by factoring pursuant to section 24-60-1301, is assigned to locations within the United States. For the purpose of this subsection (8.5)(b)(I)(B), "United States" is restricted to the fifty states and the District of Columbia.

(C) Every member of the affiliated group that is a domestic international sales corporation as described in sections 991 to 994 of the internal revenue code or an export trade corporation as described in sections 970 and 971 of the internal revenue code; and

(D) Every member of the affiliated group that is incorporated in a foreign jurisdiction for the purpose of tax avoidance.

(II) To the extent such amounts are not already taken into account pursuant to subsection (8.5)(b)(I) of this section, the combined group shall also take into account:

(A) The apportionable income of a member of the affiliated group that is effectively connected or treated as effectively connected pursuant to the internal revenue code with the conduct of a trade or business within the United States and, for that reason, subject to federal income tax and the related apportionment factors; and

(B) In the case of a member of the affiliated group that is a resident of a country that does not have a comprehensive income tax treaty with the United States and earns more than twenty percent of its net income, directly or indirectly, from intangible property or service-related activities that are deductible from the apportionable income of one or more members of the combined group, the related net income and the apportionment factors.

(III) For purposes of this subsection (8.5)(b), a member of the affiliated group is presumptively incorporated in a foreign jurisdiction for the purpose of tax avoidance if the member is incorporated in a listed jurisdiction. A member is not incorporated in a foreign jurisdiction for the purpose of tax avoidance if the combined group proves to the satisfaction of the executive director, or if the executive director determines, that the member is incorporated in a listed jurisdiction for reasons that meet the economic substance doctrine described in section 7701 (o) of the internal revenue code.

(c) (I) The combined group must make a water's-edge election on a timely filed, original return for an income tax year.

(II) (A) Except as provided in subsection (8.5)(c)(II)(C) of this section, a combined group's water's-edge election is binding for and applicable to the income tax year when the combined group makes the election and each of the nine income tax years thereafter.

(B) Upon the expiration of the period described in subsection (8.5)(c)(II)(A) of this section, a combined group may withdraw the water's-edge election. The combined group must withdraw the election on a timely filed, original tax return for the first income tax year after the period described in subsection (8.5)(c)(II)(A) of this section, or by other written withdrawal made in the time and manner prescribed by rules promulgated by the executive director. Except as provided in subsection (8.5)(c)(II)(C) of this section, a combined group's withdrawal of an election is binding for and applicable to the income tax year when the combined group withdraws the election and each of the nine income tax years thereafter. If the combined group does not withdraw the election as described in this subsection (8.5)(c)(II)(B), the election is deemed renewed for an additional ten-year period, subject to the same conditions as applied to the original election.

(C) A combined group may petition the executive director to withdraw a water's-edge election prior to the expiration of the period set forth in subsection (8.5)(c)(II)(A) of this section, or to reinstate a withdrawn election, upon a showing of reasonable cause based upon extraordinary hardship due to unforeseen changes in state tax statutes, law, or policy. If the executive director grants a withdrawal of an election, the executive director may impose reasonable conditions as necessary to prevent the evasion of tax or to clearly reflect net income for the election period prior to or after the withdrawal.

(III) The executive director may promulgate rules governing the effect, if any, on the scope or application of a water's-edge election, including the procedures for election and termination or deemed election, resulting from a change in the composition of the unitary group, the combined group, the members, and any other similar change.

(d) The executive director may disregard a water's-edge election in part or in whole, and the net income and apportionment factors of any member of the unitary group may be included in the combined report, without regard to subsections (8.5)(a) to (8.5)(c) of this section, if:

(I) Any member of the unitary group knowingly fails to comply with or recklessly disregards any provision of this article 22 or any provision of article 21 of this title 39; or

(II) A person otherwise not included in the water's-edge combined group is used for a substantial state income tax avoidance purpose.

(e) A combined group's water's-edge election pursuant to this subsection (8.5) has no effect on whether a person excluded from the water's-edge combined group may be separately liable for the tax imposed by this article 22. A person excluded from a water's-edge combined group and subject to the tax imposed by this article 22 shall separately file and pay such tax as provided in this article 22.

(9) Dividends which a C corporation includable in a combined report receives from another C corporation also includable in the combined report shall be excluded from taxable income.

(10) As used in this subsection (10), "foreign source income" means taxable income from sources without the United States, as used in section 862 of the internal revenue code. In apportioning and allocating income pursuant to section 39-22-303.5, 39-22-303.6, or 39-22-303.7, foreign source income shall be considered only to the extent provided in this subsection (10):

(a) If, for federal income tax purposes, the taxpayer has elected to claim foreign taxes paid or accrued as a deduction, then all foreign source income minus such deduction shall be considered;

(b) (I) If, for federal income tax purposes, the taxpayer has elected to claim foreign taxes paid or accrued as a credit, then foreign source income shall be considered only to the extent that such income exceeds the exclusion provided by this paragraph (b).

(II) For income tax years commencing prior to January 1, 2000, the amount to be excluded is determined by multiplying the foreign source income by a fraction, the numerator of which is the total of taxes paid or accrued to foreign countries and United States possessions by or on behalf of the C corporation pursuant to section 901 of the internal revenue code, deemed paid pursuant to section 960 of the internal revenue code for the tax year, or carried over or carried back to such tax year pursuant to section 904 (c) of the internal revenue code. The denominator of said fraction shall be forty-six percent of the foreign source income.

(III) For income tax years commencing on or after January 1, 2000, the amount to be excluded is determined by multiplying the foreign source income by a fraction, the numerator of which is the total of taxes paid or accrued to foreign countries and United States possessions by or on behalf of the C corporation pursuant to section 901 of the internal revenue code, deemed paid pursuant to section 960 of the internal revenue code for the tax year, or carried over or carried back to such tax year pursuant to section 904 (c) of the internal revenue code. The denominator of said fraction shall be the same percentage as the effective federal corporate income tax rate multiplied by the foreign source income. As used in this subsection (10), "effective federal corporate income tax rate" means the taxpayer's federal corporate income tax calculated in accordance with section 11 (a) and (b) of the internal revenue code for such tax year divided by the taxpayer's federal taxable income.

(c) Foreign source income from a foreign C corporation within an affiliated group of C corporations shall be determined without regard to section 882 (a)(2) of the internal revenue code.

(11) For tax years beginning before January 1, 2026:

(a) In the case of an affiliated group of C corporations, the executive director may require, or the taxpayer may file, a combined report, but such report shall only include those members of an affiliated group of C corporations as to which any three of the following facts have been in existence in the tax year and the two preceding tax years:

(I) Sales or leases by one affiliated C corporation to another affiliated C corporation constitute fifty percent or more of the gross operating receipts of the C corporation making the sales or leases; or, purchases or leases from one affiliated C corporation by another affiliated C corporation constitute fifty percent or more of the cost of goods sold or leased by the C corporation making the purchases or leases. This subparagraph (I) shall not apply to the following transactions between affiliated C corporations: The issuance of commercial paper or other debt obligations and the use of the proceeds therefrom to make loans or to purchase receivables between affiliated C corporations.

(II) Five or more of the following services are provided by one or more affiliated C corporations for the benefit of another affiliated C corporation: Advertising and public relations services; accounting and bookkeeping services; legal services; personnel services; sales services; purchasing services; research and development services; insurance procurement and servicing exclusive of employee benefit programs; and employee benefit programs including pension, profit-sharing, and stock purchase plans. A service shall be deemed provided if fifty percent or more of the service is provided without provision for an "arm's length charge" within the meaning of the United States treasury regulation 1.482-2 (b)(3).

(III) Twenty percent or more of the long-term debt of one affiliated C corporation is owed to or guaranteed by another affiliated C corporation. For the purposes of this subparagraph (III), "long-term debt" means debt which becomes due more than one year after incurred.

(IV) One affiliated C corporation substantially uses the patents, trademarks, service marks, logo-types, trade secrets, copyrights, or other proprietary materials owned by another affiliated C corporation.

(V) Fifty percent or more of the members of the board of directors of one affiliated C corporation are members of the board of directors or are corporate officers of another affiliated C corporation.

(VI) Twenty-five percent or more of the twenty highest-ranking officers of an affiliated C corporation are members of the board of directors or are corporate officers of another affiliated C corporation.

(b) The net income of the affiliated C corporations which are to be included in a combined report shall be determined pursuant to the rules and regulations promulgated pursuant to section 1502 of the internal revenue code, as modified by section 39-22-304.

(c) If an affiliated C corporation is included in a combined report, section 39-22-303.5, 39-22-303.6, or 39-22-303.7 shall be applied with the following modifications:

(I) Intercompany transactions among the affiliated C corporations shall be excluded from the numerator and denominator of the apportionment calculation set forth in section 39-22-303.5, 39-22-303.6, or 39-22-303.7; and

(II) (A) For income tax years commencing before January 1, 2022, the numerator of the apportionment calculation set forth in section 39-22-303.5 or 39-22-303.6 shall be, to the extent applicable, the sum of the sales of those affiliated C corporations doing business in Colorado.

(B) For income tax years commencing on or after January 1, 2022, the combined group apportionment factor is a fraction determined under section 39-22-303.6, as modified, if applicable, by section 39-22-303.7, where the numerator of the factor includes amounts sourced to the state, regardless of the separate entity to which those factors may be attributed, and the denominator of the factor includes amounts associated with the combined group's business wherever located.

(d) The executive director shall not require returns to be made on a consolidated basis, but an affiliated group of C corporations may elect to file a consolidated return as otherwise provided in this article.

(e) (Deleted by amendment, L. 2008, p. 955, § 7, effective January 1, 2009.)

(f) For purposes of this section, any C corporation formed under the laws of any state or the United States with de minimis or no property and payroll, as determined by factoring pursuant to section 24-60-1301, shall be deemed to satisfy the requirements of subsection (11)(a) of this section. The department of revenue shall adopt rules to determine the manner in which the de minimis standard will be uniformly applied to taxpayers.

(g) For the purpose of satisfying the requirements of subsections (11)(a)(I) to (11)(a)(IV) of this section, the activities of any entity formed under the laws of any state or the United States that is treated as a partnership pursuant to part 2 of this article 22, shall be treated as activities performed by the member of the affiliated group of C corporations that owns a portion of the entity if more than fifty percent of the entity's ownership interest is held in the aggregate by one or more members of the affiliated group. If the entity is owned by more than one member of the affiliated group, the activities of the entity shall be treated as activities performed by each member that owns a portion of the entity.

(11.2) Subsection (11) of this section and this subsection (11.2) are repealed, effective December 31, 2031.

(11.5) (a) The general assembly finds and declares that:

(I) Subsection (11)(a) of this section was enacted in 1985 to implement unitary combined reporting in Colorado. However, that subsection is unique among states that employ unitary combined reporting, uses arbitrary tests that have been difficult for taxpayers and the department of revenue to apply, and has created unnecessary tax compliance challenges because Colorado's approach diverges from other states.

(II) Including all amounts sourced to Colorado for the combined group best effectuates unitary combined reporting, regardless of the separate entity to which those factors may be attributed. Doing so recognizes that the unitary group is a single taxpayer and prevents corporate form from governing economic substance.

(III) Section 39-22-301 and this section, as amended by House Bill 24-1134, enacted in 2024, allow Colorado to join other states with similar combined reporting standards and implement unitary combined reporting in a manner that simplifies the preparation of corporate income tax returns in Colorado without arbitrary tests that are difficult to apply.

(b) For tax years beginning on and after January 1, 2026:

(I) Except as provided in subsection (8) or (8.5) of this section, all of the members of an affiliated group of C corporations, wherever incorporated or domiciled, that are members of a unitary business shall file a combined report as a combined group.

(II) (A) The net income of each member of the combined group, as determined under section 39-22-304, is combined, eliminating items of income, expense, gain, and loss from transactions between members of the combined group, applying the consolidated filing rules under the internal revenue code, and the regulations thereunder, as if the combined group was a consolidated filing group.

(B) A combined group shall eliminate dividends from a combined report to the extent permitted under subsection (9) of this section.

(C) For income tax years beginning on or after January 1, 2027, to the extent the net income of a member of a combined group includes subpart F income or net CFC tested income with respect to another member of the combined group of which the member is a United States shareholder, the combined group shall eliminate such subpart F or net CFC tested income from a combined report.

(III) (A) Except as otherwise provided in this section, section 39-22-303.6, as modified, if applicable, by section 39-22-303.7, determines how income or loss, or items making up income or loss, are allocated and apportioned to this state.

(B) The combined group apportionment factor is a fraction determined under section 39-22-303.6, as modified, if applicable, by section 39-22-303.7, where the numerator of the factor includes amounts sourced to the state for the combined group's unitary business, regardless of the separate entity to which those factors may be attributed, and the denominator of the factor includes amounts associated with the combined group's unitary business wherever located.

(C) Intercompany transactions among members of the combined group are excluded from the numerator and denominator of the apportionment calculation set forth in section 39-22-303.6, as modified, if applicable, by section 39-22-303.7.

(D) If a member of the combined group holds a partnership interest from which it derives apportionable income, the share of partnership's apportionment factor to be included in the apportionment factor of the combined group is determined by multiplying the partnership's factor by a ratio, the numerator of which is the amount of the partnership's apportionable income properly included in the member's income, whether received directly or indirectly, and including any guaranteed payments, and the denominator of which is the amount of the partnership's total apportionable income. In the case of a partnership that is unitary with the partner, receipts from intercompany transactions between the partnership and the partner, or any other member of the combined group, are excluded from the numerator and denominator of the apportionment calculation as follows: Receipts from sales by the partner, or any member of the partner's combined group, to the partnership to the extent of the partner's interest in the partnership; and receipts from sales by the partnership to the partner, or any member of the partner's combined group, not to exceed the partner's interest in all partnership sales. If a member of the combined group directly or indirectly receives an allocation of a partnership tax item, such as an item of loss or expense, so that it is not possible to determine the member's share of apportionable income, the executive director may promulgate rules for inclusion of particular partnership factors, or portions of factors, in the combined group's factors.

(IV) The combined report must be filed under the name and federal employer identification number of the parent corporation if the parent is a member of the combined group. If there is no parent corporation, or if the parent is not a group member, the members of the combined group shall choose a member to file the return. The filing member must remain the same in subsequent years unless the filing member is no longer the parent corporation or is no longer a member of the combined group. The return must be signed by a responsible officer of the filing member on behalf of the combined group members as required by section 39-22-601 (2).

(V) Members of the combined group are jointly and severally liable for the tax liability of the combined group included in the combined return.

(VI) The executive director shall not require returns to be made on a consolidated basis, but an affiliated group of C corporations may elect to file a consolidated return as otherwise provided in this article 22.

(12) As used in this section, unless the context otherwise requires:

(a) "Affiliated group" means:

(I) One or more includable C corporations connected directly or indirectly through stock ownership with a common parent C corporation that is an includable C corporation if:

(A) Stock possessing more than fifty percent of the voting power of all classes of stock and more than fifty percent of each class of the nonvoting stock of each of the includable C corporations, except the common parent C corporation, is owned directly or indirectly by one or more of the other includable C corporations; and

(B) The common parent C corporation owns directly or indirectly stock possessing more than fifty percent of the voting power of all classes of stock and more than fifty percent of each class of the nonvoting stock of at least one of the other includable C corporations.

(II) As used in this subsection (12)(a), the term "stock" does not include nonvoting stock that is limited and preferred as to dividends, employer securities, within the meaning of section 409 (1) of the internal revenue code, while such securities are held under a tax credit employee stock ownership plan, or qualifying employer securities, within the meaning of section 4975 (e)(8) of the internal revenue code, while such securities are held under an employee stock ownership plan which meets the requirements of section 4975 (e)(7) of the internal revenue code.

(a.3) "Combined group" means the affiliated group of C corporations that must file a combined report as required by subsection (11.5) of this section.

(a.5) "Combined report" means a tax return required to be filed for the combined group containing information as provided in this article 22 or required by the executive director.

(b) "Listed jurisdiction" means:

(I) For income tax years commencing before January 1, 2026, Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Barbados, Belize, Bermuda, Bonaire, British Virgin Islands, Cayman Islands, Cook Islands, Curaçao, Cyprus, Dominica, Gibraltar, Grenada, Guernsey-Sark-Alderney, Isle of Man, Jersey, Liberia, Luxembourg, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Niue, Panama, Saba, Samoa, San Marino, Seychelles, Sint Eustatius, Sint Maarten, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos Islands, U.S. Virgin Islands, and Vanuatu;

(II) For income tax years commencing on or after January 1, 2026, but before January 1, 2027, the jurisdictions listed in subsection (12)(b)(I) of this section and Hong Kong, Republic of Ireland, Liechtenstein, Netherlands, and Singapore; and

(III) For income tax years commencing on or after January 1, 2027, the jurisdictions listed in subsection (12)(b)(I) of this section and Hong Kong, Republic of Ireland, Netherlands, and Singapore.

(c) Repealed.

(c.3) "Net CFC tested income" means income included as federal gross income pursuant to section 951A (a) of the internal revenue code.

(c.5) "Subpart F income" means income included as federal gross income pursuant to section 951 (a) of the internal revenue code.

(d) "Taxpayer" means a C corporation or combined group subject to the tax imposed by section 39-22-301.

(e) "Unitary business" means a single economic enterprise made up either of separate parts of a single C corporation or of an affiliated group of C corporations that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts. A unitary business includes that part of the business that is conducted by a taxpayer through the taxpayer's interest in a partnership, whether the interest in that partnership is held directly or indirectly through a series of partnerships or other pass-through entities.

(13) Repealed.

(14) (Deleted by amendment, L. 2008, p. 955, § 7, effective January 1, 2009.)

(15) Repealed.

(16) (a) During the state fiscal year beginning July 1, 2027, and every fourth state fiscal year thereafter, the department shall engage a contractor to examine whether a country that is identified as a listed jurisdiction should remain a listed jurisdiction.

(b) The department shall require the contractor to examine each listed jurisdiction and to make recommendations about the status of a listed jurisdiction in a written report submitted to the executive committee of the legislative council and the governor no later than one hundred eighty calendar days after the effective date of the contract engaging the contractor to conduct the study.

(c) When examining a listed jurisdiction, the department shall require the contractor to recommend whether a listed jurisdiction should continue to be a listed jurisdiction based on whether the listed jurisdiction:

(I) Assesses a corporate tax rate of less than fifteen percent;

(II) Allows tax deductions, incentives, or credits that lower effective tax rates artificially, with special consideration given to intellectual property and foreign-source royalties;

(III) Targets profit-shifting of foreign-controlled corporations;

(IV) Lacks transparency and does not engage in data sharing or cooperate with other countries' revenue agencies during audits and investigations or does not participate in country-by-country reporting;

(V) Does not require a corporation to engage in substantial activity or deliver economic substance in the listed jurisdiction in order to be incorporated in that jurisdiction;

(VI) Does not maintain a beneficial ownership registry or does not provide the public with access to company information;

(VII) Allows hybrid-mismatch relationships;

(VIII) Allows overly lenient transfer pricing;

(IX) Allows income-shifting between corporate affiliates or other indicators of profit-shifting;

(X) Has not undertaken reforms to address allegations that it is a tax haven and that it should not be a listed jurisdiction;

(XI) Provides certain tax or other benefits exclusively for foreign firms and not to domestic entities;

(XII) Engages in other tax evasion indicators; or

(XIII) Issues corporate profit or foreign direct investment statistics that are significantly out of proportion to local economic development or the local workforce.

(d) A country may submit to the contractor or the department information about international tax reform and evolving best practices.

(e) The contractor may recommend that a country be deemed a listed jurisdiction or recommend that a country no longer be a listed jurisdiction.