Section 229. Qualified Equity and Subordinated Debt Investments Tax Credit; required equity and subordinated debt investment holding period

A. Equity received in connection with a qualified business investment must be held by the taxpayer for at least five full calendar years following the calendar year for which a tax credit for a qualified investment is earned except in any of the following instances: (i) the liquidation of the qualified business issuing such equity; (ii) the merger, consolidation or other acquisition of such business with or by a party not affiliated with such business; or (iii) the death of the taxpayer.

B. The five-calendar year holding period is to be distinguished from the redemption period (five years from the date of issuance) during which an equity investment cannot be required, or be subject to an option on the part of the taxpayer, to be redeemed by the issuer. The redemption period requirement must be met in order to qualify an equity investment for credit eligibility. The five-calendar year holding period must be met in order to avoid recapture of the credit.

C. A subordinated debt instrument received in connection with a qualified business investment must be held by the taxpayer for at least three years after the date of issuance except in any of the following instances: (i) the liquidation of the qualified business issuing such subordinated debt; (ii) the merger, consolidation or other acquisition of such business with or by a party not affiliated with such business; or (iii) the death of the taxpayer.

D. The holding period of a subordinated debt instrument received in connection with a qualified business investment that is convertible into equity may be effected by the date it is converted. If such subordinated debt is held for at least three years after the date of issuance, the holding period will be deemed to have been satisfied and equity resulting from a subsequent conversion would not be subject to any holding period. If such subordinated debt is converted within three years after the date of issuance, the equity must be held for at least five calendar years following the calendar year in which the subordinated debt was issued. Conversion of such subordinated debt within three years after the date of issuance would not be considered repayment of principal.

E. If the holding period requirement for the equity or subordinated debt is not met, the taxpayer shall immediately notify the Department of Taxation of such failure and forfeit all used and unused tax credits. The notice of failure to meet the statutory requirements shall specify the aggregated credits claimed to date. The notice shall be deemed a tax assessment, to which the Department of Taxation shall add a penalty equal to the amount of the forfeit credits. In addition thereto, interest on the tax assessment and penalty shall be assessed at the rate of 1.0% per month, compounded monthly, from the date the tax credits were claimed by the taxpayer.

F. Upon written request, the Department of Taxation shall have the discretion to abate any assessed penalty, in full or in part, if the taxpayer establishes reasonable cause for the failure to hold such equity or subordinated debt for the required holding period. The reason for any such abatement shall be preserved among the records of the Department of Taxation.

Historical Notes

Derived from Volume 18, Issue 11, eff. March 13, 2002.

Statutory Authority

§§ 58.1-203 and 58.1-339.4 of the Code of Virginia.