Collapse to view only § 1298. Special rules
§ 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 general
(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 general
(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 general
(B) Exception
(4) Treatment of holders of options
(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 body
(Added Pub. L. 99–514, title XII, § 1235(a), Oct. 22, 1986, 100 Stat. 2572, § 1296; amended Pub. L. 100–647, title I, §§ 1012(p)(2), (5), (16), (26), (27), 1018(u)(40), Nov. 10, 1988, 102 Stat. 3515, 3518–3520, 3592; Pub. L. 103–66, title XIII, § 13231(d)(1), (3), Aug. 10, 1993, 107 Stat. 499; Pub. L. 104–188, title I, § 1704(r)(1), Aug. 20, 1996, 110 Stat. 1887; renumbered § 1297 and amended Pub. L. 105–34, title XI, §§ 1121, 1122(a), (d)(4), 1123, Aug. 5, 1997, 111 Stat. 971, 972, 977; Pub. L. 105–206, title VI, § 6011(b)(1), (d), July 22, 1998, 112 Stat. 817, 818; Pub. L. 110–172, § 11(a)(24)(A), (g)(18), Dec. 29, 2007, 121 Stat. 2486, 2491; Pub. L. 115–97, title I, § 14501(a), (b), Dec. 22, 2017, 131 Stat. 2234.)
§ 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 general
(B) 50-percent limitation not to apply to PFIC
(3) Partnerships, etc.
(4) Options
(5) Successive application
(b) Other special rulesFor purposes of this part—
(1) Time for determination
(2)A 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 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 income
(6) Dispositions
(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 stock
(8) Treatment of certain subpart F inclusions
(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 general
(2) Amount taken into account
(A) In general
(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 expenditures
(2) Certain licensed intangibles
(A) In general
(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 corporation
(f) Reporting requirement
(g) Regulations
(Added Pub. L. 99–514, title XII, § 1235(a), Oct. 22, 1986, 100 Stat. 2573, § 1297; amended Pub. L. 100–647, title I, § 1012(p)(10), (17), (20), (22), (24), (35), (36), Nov. 10, 1988, 102 Stat. 3517–3519, 3522; Pub. L. 101–239, title VII, § 7811(i)(4), Dec. 19, 1989, 103 Stat. 2410; Pub. L. 103–66, title XIII, § 13231(d)(2), (4), Aug. 10, 1993, 107 Stat. 499; Pub. L. 104–188, title I, §§ 1501(b)(10), (11), 1703(i)(5), (6), Aug. 20, 1996, 110 Stat. 1826, 1876; renumbered § 1298 and amended Pub. L. 105–34, title XI, § 1122(a), (e), Aug. 5, 1997, 111 Stat. 972, 977; Pub. L. 105–206, title VI, § 6011(b)(2), July 22, 1998, 112 Stat. 818; Pub. L. 110–172, § 11(a)(24)(C), (f)(2), Dec. 29, 2007, 121 Stat. 2487, 2489; Pub. L. 111–147, title V, § 521(a), Mar. 18, 2010, 124 Stat. 112; Pub. L. 115–141, div. U, title IV, § 401(a)(184)–(186), (d)(1)(D)(viii)(III), Mar. 23, 2018, 132 Stat. 1193, 1207.)