{"data":{"id":"us-ky/krs-141.205","jurisdiction":"us-ky","citation":"KRS 141.205","heading":"Disallowance of certain deductions for affiliated entities or related parties.","body":"(1) As used in this section:\n(a) \"Intangible property\" means franchises, patents, patent applications, trade\nnames, trademarks, service marks, copyrights, trade secret s, and similar types\nof intangible assets;\n(b) \"Intangible expenses\" includes the following only to the extent that the\namounts are allowed as deductions or costs in determining taxable net income\nbefore the application of any net operating loss deduction provided under\nChapter 1 of the Internal Revenue Code:\n1. Expenses, losses, and costs for, related to, or in connection directly or\nindirectly with the direct or indirect acquisition, use, maintenance,\nmanagement, ownership, sale, exchange, or any other di sposition of\nintangible property;\n2. Losses related to, or incurred in connection directly or indirectly with,\nfactoring transactions or discounting transactions;\n3. Royalty, patent, technical, and copyright fees;\n4. Licensing fees; and\n5. Other similar expenses and costs;\n(c) \"Intangible interest expense\" means only those amounts which are directly or\nindirectly allowed as deductions under Section 163 of the Internal Revenue\nCode for purposes of determining taxable income under that code, to the\nextent that the amounts are directly or indirectly for, related to, or connected\nto the direct or indirect acquisition, use, maintenance, management,\nownership, sale, exchange, or any other disposition of intangible property;\n(d) \"Management fees\" includes but is no t limited to expenses and costs paid for\nservices pertaining to accounts receivable and payable, employee benefit\nplans, insurance, legal, payroll, data processing, purchasing, tax, financial and\nsecurities, accounting, reporting and compliance services or  similar services,\nonly to the extent that the amounts are allowed as a deduction or cost in\ndetermining taxable net income before application of the net operating loss\ndeduction for the taxable year provided under Chapter 1 of the Internal\nRevenue Code;\n(e) \"Affiliated group\" has the same meaning as in KRS 141.201;\n(f) \"Foreign corporation\" means a corporation that is organized under the laws of\na country other than the United States and that would be a related member if it\nwere a domestic corporation;\n(g) \"Related member\" means a person that, with respect to the entity during all or\nany portion of the taxable year, is:\n1. A person or entity that has, directly or indirectly, at least fifty percent\n(50%) of the equity ownership interest in the taxpayer, as d etermined\nunder Section 318 of the Internal Revenue Code;\n2. A component member as defined in Section 1563(b) of the Internal\nRevenue Code;\n3. A person to or from whom there is attribution of stock ownership in\naccordance with Section 1563(e) of the Internal Revenue Code; or\n4. A person that, notwithstanding its form of organization, bears the same\nrelationship to the taxpayer as a person described in subparagraphs 1. to\n3. of this paragraph;\n(h) \"Recipient\" means a related member or foreign corporation to whom the item\nof income that corresponds to the intangible interest expense, the intangible\nexpense, or the management fees, is paid;\n(i) \"Unrelated party\" means a person that has no direct, indirect, beneficial or\nconstructive ownership interest in the recipient; and in which the recipient has\nno direct, indirect, beneficial or constructive ownership interest;\n(j) \"Disclosure\" means that the entity shall provide the following information to\nthe Department of Revenue with its tax return regarding a related party\ntransaction:\n1. The name of the recipient;\n2. The state or country of domicile of the recipient;\n3. The amount paid to the recipient; and\n4. A description of the nature of the payment made to the recipient;\n(k) \"Other related party transaction\" means a transaction which:\n1. Is undertaken by an entity which was not required to file a consolidated\nreturn under KRS 141.201;\n2. Is undertaken by an entity, directly or indirectly, with one (1) or more of\nits stockholders, members, partners, or affiliated entities; and\n3. Is not within the scope of subsections (2) and (3) of this section;\n(l) \"Related party costs\" means intangible expense, intangible interest expense,\nmanagement fees and any costs or expenses associated with other related party\ntransactions; and\n(m) \"Entity\" means any taxpayer other than a natural person.\n(2) An entity subject to the tax imposed by this chapter shall not be allowed to deduct\nan intangible expense, an intangible interest expense, or a management fee directly\nor indirectly paid, accrued or incurred to, or in connection directly or indirectly with\none (1) or more direct or indirect transactions with one (1) or more related members\nor with a foreign corporation as defined in subsection (1) of this section, or with an\nentity that would be included in the affiliated group based upon ownership interest\nif it were organized as a corporation.\n(3) The disallowance of deductions provided by subsection (2) of this section shall not\napply if:\n(a) The entity and the recipient are both include d in the same consolidated\nKentucky corporation income tax return for the relevant taxable year; or\n(b) The entity makes a disclosure, and establishes by a preponderance of the\nevidence that:\n1. The payment made to the recipient was subject to, in its stat e or country\nof commercial domicile, a net income tax, or a franchise tax measured\nby, in whole or in part, net income. If the recipient is a foreign\ncorporation, the foreign nation shall have in force a comprehensive\nincome tax treaty with the United States; and\n2. The recipient is engaged in substantial business activities separate and\napart from the acquisition, use, licensing, management, ownership, sale,\nexchange, or any other disposition of intangible property, or in the\nfinancing of related members, as evidenced by the maintenance of\npermanent office space and full -time employees dedicated to the\nmaintenance and protection of intangible property; and\n3. The transaction giving rise to the intangible interest expense, intangible\nexpense, or management f ees between the entity and the recipient was\nmade at a commercially reasonable rate and at terms comparable to an\narm's-length transaction; or\n(c) The entity makes a disclosure, and establishes by preponderance of the\nevidence that the recipient regularly engages in transactions with one (1) or\nmore unrelated parties on terms identical to that of the subject transaction; or\n(d) The entity and the Department of Revenue agree in writing to the application\nor use of an alternative method of apportionment under KRS 141.120.\n(4) An entity subject to the tax imposed by this chapter may deduct expenses or costs\nassociated with an other related party transaction only in an amount equal to the\namount which would have resulted if the other related party transaction had been\ncarried out at arm's length. In any dispute between the department and the entity\nwith respect to the amount which would have resulted if the transaction had been\ncarried out at arm's length, the entity shall bear the burden of establishing the\namount by a preponderance of the evidence.\n(5) Nothing in this section shall be deemed to prohibit an enti ty from deducting a\nrelated party cost in an amount permitted by this section, provided that the entity\nhas incurred related party costs equal to or greater than the amounts permitted by\nthis section.\n(6) If it is determined by the department that the amou nt of a deduction claimed by an\nentity with respect to a related party cost is greater than the amount permitted by\nthis section, the net income of the entity shall be adjusted to reflect the amount of\nthe related party cost permitted by this section.\n(7) For tax periods ending before January 1, 2005, in the case of entities not required to\nfile a consolidated or combined return under subsection (1) of this section that\ncarried on transactions with stockholders or affiliated entities directly or indirectly,\nthe department shall adjust the net income of such entities to an amount that would\nresult if such transactions were carried on at arm's length.","path":["KRS Chapter 141"],"source_url":"https://apps.legislature.ky.gov/law/statutes/statute.aspx?id=49917","current_through":"Includes enactments through the 2026 Regular Session","vintage":"09/05/2026","retrieved_at":"2026-09-05T20:50:34Z","sha256":"ee8bf857fce98dc935a93ef64e992b739b7851a67741592ea77fd30d032e09ec","source_id":"us-ky","stale":false,"prev":"us-ky/krs-141.202","next":"us-ky/krs-141.206"},"notice":"GroundRules: Original legal text. Not legal advice."}