USC Subpart D

in effect

26 U.S.C. § 1297 Passive foreign investment company

(a) In generalFor purposes of this part, except as otherwise provided in this subpart, the term “passive foreign investment company” means any foreign corporation if—(1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or (2) the average percentage of assets (as determined in accordance with subsection (e)) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent. (b) Passive incomeFor purposes of this section—(1) In generalExcept as provided in paragraph (2), the term “passive income” means any income which is of a kind which would be foreign personal holding company income as defined in section 954(c). (2) ExceptionsExcept as provided in regulations, the term “passive income” does not include any income—(A) derived in the active conduct of a banking business by an institution licensed to do business as a bank in the United States (or, to the extent provided in regulations, by any other corporation), (B) derived in the active conduct of an insurance business by a qualifying insurance corporation (as defined in subsection (f)), (C) which is interest, a dividend, or a rent or royalty, which is received or accrued from a related person (within the meaning of section 954(d)(3)) to the extent such amount is properly allocable (under regulations prescribed by the Secretary) to income of such related person which is not passive income, or (D) which is export trade income of an export trade corporation (as defined in section 971). For purposes of subparagraph (C), the term “related person” has the meaning given such term by section 954(d)(3) determined by substituting “foreign corporation” for “controlled foreign corporation” each place it appears in section 954(d)(3). (c) Look-thru in the case of 25-percent owned corporationsIf a foreign corporation owns (directly or indirectly) at least 25 percent (by value) of the stock of another corporation, for purposes of determining whether such foreign corporation is a passive foreign investment company, such foreign corporation shall be treated as if it—(1) held its proportionate share of the assets of such other corporation, and (2) received directly its proportionate share of the income of such other corporation. (d) Exception for United States shareholders of controlled foreign corporations(1) In generalFor purposes of this part, a corporation shall not be treated with respect to a shareholder as a passive foreign investment company during the qualified portion of such shareholder’s holding period with respect to stock in such corporation. (2) Qualified portionFor purposes of this subsection, the term “qualified portion” means the portion of the shareholder’s holding period—(A) which is after December 31, 1997, and (B) during which the shareholder is a United States shareholder (as defined in section 951(b)) of the corporation and the corporation is a controlled foreign corporation. (3) New holding period if qualified portion ends(A) In generalExcept as provided in subparagraph (B), if the qualified portion of a shareholder’s holding period with respect to any stock ends after December 31, 1997, solely for purposes of this part, the shareholder’s holding period with respect to such stock shall be treated as beginning as of the first day following such period. (B) ExceptionSubparagraph (A) shall not apply if such stock was, with respect to such shareholder, stock in a passive foreign investment company at any time before the qualified portion of the shareholder’s holding period with respect to such stock and no election under section 1298(b)(1) is made. (4) Treatment of holders of optionsParagraph (1) shall not apply to stock treated as owned by a person by reason of section 1298(a)(4) (relating to the treatment of a person that has an option to acquire stock as owning such stock) unless such person establishes that such stock is owned (within the meaning of section 958(a)) by a United States shareholder (as defined in section 951(b)) who is not exempt from tax under this chapter. (e) Methods for measuring assets(1) Determination using valueThe determination under subsection (a)(2) shall be made on the basis of the value of the assets of a foreign corporation if—(A) such corporation is a publicly traded corporation for the taxable year, or (B) paragraph (2) does not apply to such corporation for the taxable year. (2) Determination using adjusted basesThe determination under subsection (a)(2) shall be based on the adjusted bases (as determined for the purposes of computing earnings and profits) of the assets of a foreign corporation if such corporation is not described in paragraph (1)(A) and such corporation—(A) is a controlled foreign corporation, or (B) elects the application of this paragraph. An election under subparagraph (B), once made, may be revoked only with the consent of the Secretary. (3) Publicly traded corporationFor purposes of this subsection, a foreign corporation shall be treated as a publicly traded corporation if the stock in the corporation is regularly traded on—(A) a national securities exchange which is registered with the Securities and Exchange Commission or the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or (B) any exchange or other market which the Secretary determines has rules adequate to carry out the purposes of this subsection. (f) Qualifying insurance corporationFor purposes of subsection (b)(2)(B)—(1) In generalThe term “qualifying insurance corporation” means, with respect to any taxable year, a foreign corporation—(A) which would be subject to tax under subchapter L if such corporation were a domestic corporation, and (B) the applicable insurance liabilities of which constitute more than 25 percent of its total assets, determined on the basis of such liabilities and assets as reported on the corporation’s applicable financial statement for the last year ending with or within the taxable year. (2) Alternative facts and circumstances test for certain corporationsIf a corporation fails to qualify as a qualified insurance corporation under paragraph (1) solely because the percentage determined under paragraph (1)(B) is 25 percent or less, a United States person that owns stock in such corporation may elect to treat such stock as stock of a qualifying insurance corporation if—(A) the percentage so determined for the corporation is at least 10 percent, and (B) under regulations provided by the Secretary, based on the applicable facts and circumstances—(i) the corporation is predominantly engaged in an insurance business, and (ii) such failure is due solely to runoff-related or rating-related circumstances involving such insurance business. (3) Applicable insurance liabilitiesFor purposes of this subsection—(A) In generalThe term “applicable insurance liabilities” means, with respect to any life or property and casualty insurance business—(i) loss and loss adjustment expenses, and (ii) reserves (other than deficiency, contingency, or unearned premium reserves) for life and health insurance risks and life and health insurance claims with respect to contracts providing coverage for mortality or morbidity risks. (B) Limitations on amount of liabilitiesAny amount determined under clause (i) or (ii) of subparagraph (A) shall not exceed the lesser of such amount—(i) as reported to the applicable insurance regulatory body in the applicable financial statement described in paragraph (4)(A) (or, if less, the amount required by applicable law or regulation), or (ii) as determined under regulations prescribed by the Secretary. (4) Other definitions and rulesFor purposes of this subsection—(A) Applicable financial statementThe term “applicable financial statement” means a statement for financial reporting purposes which—(i) is made on the basis of generally accepted accounting principles, (ii) is made on the basis of international financial reporting standards, but only if there is no statement that meets the requirement of clause (i), or (iii) except as otherwise provided by the Secretary in regulations, is the annual statement which is required to be filed with the applicable insurance regulatory body, but only if there is no statement which meets the requirements of clause (i) or (ii). (B) Applicable insurance regulatory bodyThe term “applicable insurance regulatory body” means, with respect to any insurance business, the entity established by law to license, authorize, or regulate such business and to which the statement described in subparagraph (A) is provided.

26 U.S.C. § 1298 Special rules

(a) Attribution of ownershipFor purposes of this part—(1) Attribution to United States personsThis subsection—(A) shall apply to the extent that the effect is to treat stock of a passive foreign investment company as owned by a United States person, and (B) except to the extent provided in regulations, shall not apply to treat stock owned (or treated as owned under this subsection) by a United States person as owned by any other person. (2) Corporations(A) In generalIf 50 percent or more in value of the stock of a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned directly or indirectly by or for such corporation in that proportion which the value of the stock which such person so owns bears to the value of all stock in the corporation. (B) 50-percent limitation not to apply to PFICFor purposes of determining whether a shareholder of a passive foreign investment company is treated as owning stock owned directly or indirectly by or for such company, subparagraph (A) shall be applied without regard to the 50-percent limitation contained therein. Section 1297(d) shall not apply in determining whether a corporation is a passive foreign investment company for purposes of this subparagraph. (3) Partnerships, etc.Stock owned, directly or indirectly, by or for a partnership, estate, or trust shall be considered as being owned proportionately by its partners or beneficiaries. (4) OptionsTo the extent provided in regulations, if any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. (5) Successive applicationStock considered to be owned by a person by reason of the application of paragraph (2), (3), or (4) shall, for purposes of applying such paragraphs, be considered as actually owned by such person. (b) Other special rulesFor purposes of this part—(1) Time for determinationStock held by a taxpayer shall be treated as stock in a passive foreign investment company if, at any time during the holding period of the taxpayer with respect to such stock, such corporation (or any predecessor) was a passive foreign investment company which was not a qualified electing fund. The preceding sentence shall not apply if the taxpayer elects to recognize gain (as of the last day of the last taxable year for which the company was a passive foreign investment company (determined without regard to the preceding sentence)) under rules similar to the rules of section 1291(d)(2). (2) Certain corporations not treated as PFIC’s during start-up yearA corporation shall not be treated as a passive foreign investment company for the first taxable year such corporation has gross income (hereinafter in this paragraph referred to as the “start-up year”) if—(A) no predecessor of such corporation was a passive foreign investment company, (B) it is established to the satisfaction of the Secretary that such corporation will not be a passive foreign investment company for either of the 1st 2 taxable years following the start-up year, and (C) such corporation is not a passive foreign investment company for either of the 1st 2 taxable years following the start-up year. (3) Certain corporations changing businessesA corporation shall not be treated as a passive foreign investment company for any taxable year if—(A) neither such corporation (nor any predecessor) was a passive foreign investment company for any prior taxable year, (B) it is established to the satisfaction of the Secretary that—(i) substantially all of the passive income of the corporation for the taxable year is attributable to proceeds from the disposition of 1 or more active trades or businesses, and (ii) such corporation will not be a passive foreign investment company for either of the 1st 2 taxable years following such taxable year, and (C) such corporation is not a passive foreign investment company for either of such 2 taxable years. (4) Separate interests treated as separate corporationsUnder regulations prescribed by the Secretary, where necessary to carry out the purposes of this part, separate classes of stock (or other interests) in a corporation shall be treated as interests in separate corporations. (5) Application of part where stock held by other entity(A) In generalUnder regulations, in any case in which a United States person is treated as owning stock in a passive foreign investment company by reason of subsection (a)—(i) any disposition by the United States person or the person owning such stock which results in the United States person being treated as no longer owning such stock, or (ii) any distribution of property in respect of such stock to the person holding such stock, shall be treated as a disposition by, or distribution to, the United States person with respect to the stock in the passive foreign investment company. (B) Amount treated in same manner as previously taxed incomeRules similar to the rules of section 959(b) shall apply to any amount described in subparagraph (A) and to any amount included in gross income under section 1293(a) (or which would have been so included but for section 951(c)) in respect of stock which the taxpayer is treated as owning under subsection (a). (6) DispositionsExcept as provided in regulations, if a taxpayer uses any stock in a passive foreign investment company as security for a loan, the taxpayer shall be treated as having disposed of such stock. (7) Treatment of certain foreign corporations owning stock in 25-percent owned domestic corporation(A) In generalIf—(i) a foreign corporation is subject to the tax imposed by section 531 (or waives any benefit under any treaty which would otherwise prevent the imposition of such tax), and (ii) such foreign corporation owns at least 25 percent (by value) of the stock of a domestic corporation, for purposes of determining whether such foreign corporation is a passive foreign investment company, any qualified stock held by such domestic corporation shall be treated as an asset which does not produce passive income (and is not held for the production of passive income) and any amount included in gross income with respect to such stock shall not be treated as passive income. (B) Qualified stockFor purposes of subparagraph (A), the term “qualified stock” means any stock in a C corporation which is a domestic corporation and which is not a regulated investment company or real estate investment trust. (8) Treatment of certain subpart F inclusionsAny amount included in gross income under section 951(a)(1)(B) shall be treated as a distribution received with respect to the stock. (c) Treatment of stock held by pooled income fundIf stock in a passive foreign investment company is owned (or treated as owned under subsection (a)) by a pooled income fund (as defined in section 642(c)(5)) and no portion of any gain from a disposition of such stock may be allocated to income under the terms of the governing instrument of such fund—(1) section 1291 shall not apply to any gain on a disposition of such stock by such fund if (without regard to section 1291) a deduction would be allowable with respect to such gain under section 642(c)(3), (2) section 1293 shall not apply with respect to such stock, and (3) in determining whether section 1291 applies to any distribution in respect of such stock, subsection (d) of section 1291 shall not apply. (d) Treatment of certain leased propertyFor purposes of this part—(1) In generalAny tangible personal property with respect to which a foreign corporation is the lessee under a lease with a term of at least 12 months shall be treated as an asset actually held by such corporation. (2) Amount taken into account(A) In generalThe amount taken into account under section 1297(a)(2) with respect to any asset to which paragraph (1) applies shall be the unamortized portion (as determined under regulations prescribed by the Secretary) of the present value of the payments under the lease for the use of such property. (B) Present valueFor purposes of subparagraph (A), the present value of payments described in subparagraph (A) shall be determined in the manner provided in regulations prescribed by the Secretary—(i) as of the beginning of the lease term, and (ii) except as provided in such regulations, by using a discount rate equal to the applicable Federal rate determined under section 1274(d)—(I) by substituting the lease term for the term of the debt instrument, and (II) without regard to paragraph (2) or (3) thereof. (3) ExceptionsThis subsection shall not apply in any case where—(A) the lessor is a related person (as defined in section 954(d)(3)) with respect to the foreign corporation, or (B) a principal purpose of leasing the property was to avoid the provisions of this part. (e) Special rules for certain intangiblesFor purposes of this part—(1) Research expendituresThe adjusted basis of the total assets of a controlled foreign corporation shall be increased by the research or experimental expenditures (within the meaning of section 174) paid or incurred by such foreign corporation during the taxable year and the preceding 2 taxable years. Any expenditure otherwise taken into account under the preceding sentence shall be reduced by the amount of any reimbursement received by the controlled foreign corporation with respect to such expenditure. (2) Certain licensed intangibles(A) In generalIn the case of any intangible property (as defined in section 367(d)(4)) with respect to which a controlled foreign corporation is a licensee and which is used by such foreign corporation in the active conduct of a trade or business, the adjusted basis of the total assets of such foreign corporation shall be increased by an amount equal to 300 percent of the payments made during the taxable year by such foreign corporation for the use of such intangible property. (B) ExceptionsSubparagraph (A) shall not apply to—(i) any payments to a foreign person if such foreign person is a related person (as defined in section 954(d)(3)) with respect to the controlled foreign corporation, and (ii) any payments under a license if a principal purpose of entering into such license was to avoid the provisions of this part. (3) Controlled foreign corporationFor purposes of this subsection, the term “controlled foreign corporation” has the meaning given such term by section 957(a). (f) Reporting requirementExcept as otherwise provided by the Secretary, each United States person who is a shareholder of a passive foreign investment company shall file an annual report containing such information as the Secretary may require. (g) RegulationsThe Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part.