Section 31K: Deductible interest; adjustments; applicability
Section 31K. The adjustments required in subsection (b) of section 31I as they relate to royalty expenses and costs and related interest expenses and costs, and in subsection (a) of section 31J as they relate to interest expenses and costs, shall not apply if the taxpayer establishes by clear and convincing evidence, as determined by the commissioner and consistent with section 3A of chapter 62C that:
(1) the royalty expenses and costs and related interest expenses and costs under section 31I, or interest expenses and costs under section 31J, were directly or indirectly paid or incurred to a related member, as defined in section 31I, that is not a controlled foreign corporation within the meaning of section 957 of the Internal Revenue Code, as amended and in effect for the taxable year; and
(2) all of the following requirements are complied with:
(i) the related member is a resident of a nation which has in force a comprehensive income tax treaty with the United States;
(ii) the amounts are deductible under federal income tax law;
(iii) the transaction giving rise to the royalty expenses and costs and related interest expenses and costs under section 31I, or interest expenses and costs under section 31J, have a valid business purpose other than the avoidance of tax that would otherwise be due; and
(iv) all terms and conditions of the transaction would have been agreed to in an arm's length negotiation between independent parties.