Question

Chris is the president and sole shareholder of MSI Corporation. He also lends money and rents a building to the corporation. Discuss how these business relationships between Chris and MSI Corporation can help avoid double taxation. What limitations are there on the use of such relationships?

Answer 1

(a) There will be no double taxation.

Rent and Interest charged by Chris from MSI corporation will be taxable income in the hands of Chris, but it will be a deductible tax expenditure in the hands of MSI Corporation. Since Chris is a single shareholder we have to consider what is the total tax liability of both Chris as an individual and as a sole shareholder of MSI Corporation.

(b) Chris has to ensure that the Interest and rent charged by him are as per market rates and on arms length basis. They will be treated as related parties and hence this precaution has to be taken assuming that the tax rates of Chris as an individual and MSI corporation are different. Suppose if tax rate of MSI corporation are higher than that of Chris and the rates charged by Chris are more than market rates, then such a practise will not be allowed by tax authorities.