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TITLE 34PUBLIC FINANCE
PART 1COMPTROLLER OF PUBLIC ACCOUNTS
CHAPTER 3TAX ADMINISTRATION
SUBCHAPTER GGINSURANCE TAX
RULE §3.833Certified Capital Companies and Certified Investor Premium Tax Credits

(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

  (1) Administrator means the Comptroller of Public Accounts for the State of Texas.

  (2) Affiliate means:

    (A) a person who is an affiliate for purposes of Insurance Code, Article 823.003;

    (B) a person who directly or indirectly:

      (i) beneficially owns 10% or more of the outstanding voting securities or other voting or management interests of another person, whether through rights, options, convertible interests, or otherwise; or

      (ii) controls or holds power to vote 10% or more of the outstanding voting securities or other voting or management interests of the other person;

    (C) a person 10% or more of which the outstanding voting securities or other voting or management interests are directly or indirectly:

      (i) beneficially owned by the other person, whether through rights, options, convertible interests, or otherwise; or

      (ii) controlled or held with power to vote by the other person;

    (D) a partnership in which the other person is a general partner; or

    (E) an officer, director, employee, or agent of the other person, or an immediate family member of the officer, director, employee, or agent of the other person.

  (3) Allocation date means the date on which the comptroller allocates premium tax credits to certified investors of a CAPCO under this section, except that in the case of a pro rata reallocation pursuant to subsection (g)(7)(B)(ii) of this section, the allocation date shall be the date of the reallocation.

  (4) CAPCO means a certified capital company as defined herein.

  (5) Certified capital means an investment of cash by a certified investor in a CAPCO that fully funds the purchase price of an equity interest in the company or a qualified debt instrument issued by the CAPCO.

  (6) Certified capital company means a partnership, corporation, trust, or limited liability company, whether organized on a profit or not-for-profit basis, that is in good standing with the State of Texas, is headquartered in Texas and has as its primary business activity the investment of cash in qualified businesses and that is certified as meeting the criteria of this section.

  (7) Certified investor means an insurance company or health maintenance organization licensed by the Texas Department of Insurance or other person that has state premium tax liability under Insurance Code, Chapter 4, or a successor statute, that invests certified capital pursuant to an allocation of premium tax credits under this section.

  (8) Early stage business means a qualified business that satisfies at least one of the following criteria:

    (A) is involved, at the time of a CAPCO's first investment, in activities related to the development of initial product or service offerings, such as prototype development or establishment of initial production or service processes;

    (B) was initially organized less than two years before the date of the CAPCO's first investment; or

    (C) during the fiscal year immediately preceding the year of the CAPCO's first investment had, on a consolidated basis with its affiliates, gross revenues of not more than $2 million as determined in accordance with generally accepted accounting principles.

  (9) Headquartered in Texas means the following requirements, at a minimum, are met with respect to Texas CAPCOs:

    (A) the CAPCO has its principal office in Texas for operations covered under this section, in which the main investment and administrative functions of the CAPCO are conducted;

    (B) the original principal books and records of the CAPCO are maintained in the Texas principal office; and

    (C) a minimum of 80% of the CAPCO's expenses are spent in Texas including management fees, and administrative costs including but not limited to organizational fees, but for the purposes of this subparagraph, expenses do not include underwriting fees; closing costs (including rating agency fees, and other fees related to the closing of the CAPCO's funding); fees related to any insurance issued for a qualified debt instrument or associated premium tax credits; interest payments on indebtedness; and other expenses for services that the CAPCO demonstrates cannot be reasonably obtained in Texas.

  (10) Initially organized means the date that an entity's organizational documents were first accepted as filed by the appropriate official in the state of its incorporation or organization, as applicable, or, in the case of an entity that is not required to file its organizational documents with any state official, the date on which its members, partners, or owners, as applicable, originally executed the entity's organizational documents.

  (11) Low-income community has the meaning assigned by Internal Revenue Code of 1986, §45D(e).

  (12) Person means a natural person or entity, including a corporation, general or limited partnership, trust, or a limited liability company.

  (13) Premium tax credit allocation claim means a claim for allocation of Texas premium tax credits on a form provided by the comptroller.

  (14) Primary or primarily under this section means at least 80%.

  (15) Principal business operations means at least 80% of the business organization's employees reside in Texas or 80% of the business payroll is paid to individuals living in Texas.

  (16) Principal office means the location in Texas that is the primary place for investment functions of the CAPCO and the principal location for books and records of the CAPCO.

  (17) Program One means the program for allocation and investment of certified capital under this chapter before January 1, 2007.

  (18) Program Two means that program for allocation and investment of certified capital on or after January 1, 2007.

  (19) Qualified business means a business that, at the time of a CAPCO's first investment in the business:

    (A) is headquartered in Texas or relocates its headquarters and principal business operations to Texas within 90 days, and based on an affidavit by an officer or owner of the business, that it intends to remain in Texas after receipt of an investment by the CAPCO;

    (B) has its principal business operations in Texas or relocates its principal business operations to Texas within 90 days, and based on a copy of its business plan or other evidence of domicile, intends to maintain business operations in Texas after receipt of an investment by the CAPCO;

    (C) has agreed to use the qualified investment primarily:

      (i) to support its principal business operations in Texas, other than for advertising, promotion, and sales operations, which may be conducted outside of Texas; or

      (ii) in the case of a start-up company, to establish and support business operations in Texas as evidenced by an affidavit of an officer or owner of the business, other than for advertising, promotion, and sales operations, which may be conducted outside of Texas;

    (D) does not have more than 100 employees either full-time or part-time employees, as evidenced by official state or federal employment tax returns or an affidavit signed by an owner or director of the business and:

      (i) at least 80% of its employees reside in Texas; or

      (ii) pays 80% of its payroll to Texas residents;

    (E) is primarily engaged in:

      (i) manufacturing, processing, or assembling products;

      (ii) conducting research and development; or

      (iii) providing services;

    (F) does not incur more than 20% of its expenses and does not receive more than 20% of its income from:

      (i) retail sales;

      (ii) real estate development;

      (iii) insurance, banking, leasing or lending; or

      (iv) the provision of professional services provided by accountants, attorneys, or physicians;

    (G) is not or does not:

      (i) formed or organized, directly or indirectly, by a CAPCO or an affiliate of the CAPCO as evidenced by a capitalization table prior to the initial investment and a post transaction proforma capitalization table;

      (ii) a franchisee of a CAPCO; or

      (iii) an affiliate of the CAPCO; or

      (iv) have any financial relationship with a CAPCO before the date on which the CAPCO makes its first investment in such business.

  (20) Qualified debt instrument means a debt instrument issued by a CAPCO, at par value or a premium that:

    (A) has an original maturity date of at least five years after the date of issuance;

    (B) has a repayment schedule that is not faster than a level principal amortization over five years, including payments of cash and tax credits. A repayment schedule is not faster than a level principal amortization over five years if the repayment schedule for the debt instrument issued by the CAPCO has a scheduled outstanding principal balance greater than a hypothetical note with the same price and yield as the CAPCO's debt instrument that provides for principal to be amortized over equal, consecutive daily payments, where payments are first allocated to accrued interest and then to principal, however, a certified investor may receive payments at any time for future earned interest, provided the amount received does not exceed the present value of that future interest payment, discounted by a factor that is not less than the stated interest rate of the debt instrument.

    (C) Has no interest, distribution, or payment features that are related to the profitability of the CAPCO or the performance of the CAPCO's investment portfolio.

  (21) Qualified distribution means any distribution or payment from certified capital, the return of capital from qualified investments, or the profits earned thereon by a CAPCO in connection with:

    (A) the reasonable costs and expenses of forming, syndicating, managing, and operating the CAPCO, provided that the distribution or payment is not made directly or indirectly to a certified investor or an affiliate of a certified investor, including:

      (i) the reasonable costs and expenses of forming, syndicating, or organizing the CAPCO, so long as these costs;

        (I) shall be limited to the greater of;

          (-a-) $250,000; or

          (-b-) 5.0% of the amount of certified capital the CAPCO initially received as investment from its certified investors; or

          (-c-) $1,500,000; and

        (II) provided that at the time the CAPCO closes its investment from its certified investors and after deducting the aggregate of the costs of organizing, forming, syndicating, insuring and defeasing the obligations, the CAPCO must have available for qualified investments, cash and/or permissible investments in an amount equal to at least 50% of the amount of certified capital initially received from its certified investors.

      (ii) reasonable and necessary fees paid for professional services, including legal and accounting services, related to the operation of the company are limited to 1.0% in any calendar year of the amount of certified capital the CAPCO initially received as investment from its certified investors; and

      (iii) an annual management fee in an amount that does not exceed 2.5% of the certified capital of the company;

    (B) any projected increase in federal income or state taxes based on income or imputed income of the CAPCO, including penalties and interest related to those taxes, of the equity owners of the CAPCO resulting from the earnings or other tax liability of the CAPCO to the extent that the increase is related to the ownership, management, or operation of the CAPCO in Texas.

  (22) Qualified investment means the investment of cash by a CAPCO in a qualified business for the purchase of any debt, debt participation, equity, or hybrid security of any nature or description, including a debt instrument or security that has the characteristics of debt, but that provides for conversion into equity or equity participation instruments such as options or warrants; provided that the investment must not have a final stated maturity or be subject to mandatory redemption or repurchase prior to two years from the date of initial investment and, provided further, that not more than 50% is used to refinance existing non-CAPCO debt. Notwithstanding the foregoing, a qualified investment shall not include an investment that results, or could result, in a CAPCO owning 50% or more of the voting or non-voting stock of a qualified business as evidenced by a proforma capitalization table presented to the administrator, unless:

    (A) such ownership is the result of:

      (i) the CAPCO's exercise of its rights and remedies following a default in the obligations of the qualified business;

      (ii) the CAPCO's exercise of preemptive rights granted to it in connection with its initial investment in a qualified business, provided such rights are exercised in connection with an investment in such qualified business by a party other than the CAPCO or an affiliate of the CAPCO;

Cont'd...

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