§ 153.30. Safe harbor leases.
(a) Definitions. The following words and terms, when used in this section, have the following meanings, unless the context clearly indicates otherwise:
(1) Lessee—The lessee under a safe harbor lease.
(2) Lessor—The lessor under a safe harbor lease.
(3) Safe harbor lease—An agreement which is characterized as a lease under section 168(f)(8) of the IRC (26 U.S.C.A. § 168(f)(8)) and the Treasury regulations thereunder.
(b) Determination of taxable income.
(1) To the extent otherwise permitted:
(i) The Federal cost recovery and interest expense deductions and the Federal rental income of a lessor attributable to safe harbor leases will be reflected in the lessor’s Pennsylvania taxable income.
(ii) The Federal deduction for rent paid and the Federal interest income of a lessee will be reflected in the lessee’s Pennsylvania taxable income.
(2) Income and deductions associated with safe harbor leases are considered part of a corporation’s regular trade or business and consequently are included in computing the business income of the corporation.
(c) Ownership of property.
(1) Under section 168(f)(8) of the IRC and the Treasury regulations thereunder, a transaction may qualify as a safe harbor lease if it is treated by the parties as a lease for Federal tax purposes only. The regulations expressly provide that the lessee may be the owner of the property under state or local law. In terms of subjectability to taxation within this Commonwealth and apportionment, safe harbor leases will have different consequences depending upon whether title to the property covered by the lease has passed to the lessor. The determination of whether title to the property covered by the safe harbor lease passes to the lessor will be determined under general principles of Pennsylvania law.
(2) The parties to the safe habor lease are required to demonstrate whether the lessor has required and retained title to the property covered by the safe harbor lease.
(d) Subjectability of lessor to Pennsylvania corporate taxation.
(1) If the sole contact of a corporation with this Commonwealth is the lease of property located in this Commonwealth under a safe harbor lease where title to the property does not pass to the corporation, the corporation will not be subject to Pennsylvania corporate taxation.
(2) If the lessor under a safe harbor lease actually takes title to the property located in this Commonwealth covered by the lease, the lessor will be treated as the owner of the property and, during the time that the title is retained by the lessor, the lessor will be subject to Pennsylvania corporate taxation.
(e) Three factor apportionment formula.
(1) If title to property covered by a safe harbor lease does not pass to the lessor, the lessee will be considered to be the owner of the property. The lessee of the property shall include the value of the property in the denominator of the property fraction, and the numerator of the fraction if the property is located in this Commonwealth. The lessor may not include the property in its property fraction. The lessee may not include a down payment or installment payment relating to the safe harbor lease in either the numerator or denominator of its sales fraction. The lessor may not include rental income attributable to the safe harbor lease in either the numerator or denominator of its sales fraction.
(2) When title to property covered by a safe harbor lease does pass to the lessor, the lessor shall report the property in the denominator of its property fraction, and in the numerator of the fraction if the property is located within this Commonwealth. The lessee shall include the value of the property in the denominator of its property fraction, and in the numerator if the property is located within this Commonwealth, at eight times its net rental value. The lessor shall include in the denominator of its sales fraction, and in the numerator if the property is located in this Commonwealth, rental income attributable to the property covered under the safe harbor lease during the time that the purchaser retains title. The lessee shall include in the denominator of its sales fraction, and in the numerator if the property is located within this Commonwealth, a down payment and installment payment attributable to the safe harbor lease.
(f) Single taxable assets fraction.
(1) If title to property covered by a safe harbor lease does not pass to the lessor, the lessee will be considered to be the owner of the property. The lessee shall include the value of the property in the denominator of its single taxable assets fraction, and the numerators of the fraction if the property is located within this Commonwealth. The lessor may not include the property in its single taxable assets fraction.
(2) When title to property covered by a safe harbor lease does pass to the lessor, the lessor shall include the property in the denominator of its single taxable assets fraction, and in the numerator of the fraction if the property is located within this Commonwealth. The lessee may not include the property in its single taxable assets fraction.
Authority The provisions of this § 153.30 issued under section 408 of the Tax Reform Code of 1971 (72 P. S. § 7408).
Source The provisions of this § 153.30 adopted January 16, 1987, effective January 17, 1987, 17 Pa.B. 273.
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