§1297 — Passive foreign investment company
3 cases·1 distinguished·2 cited
Statute Text — 26 U.S.C. §1297
For purposes of this part, except as otherwise provided in this subpart, the term “passive foreign investment company” means any foreign corporation if—
75 percent or more of the gross income of such corporation for the taxable year is passive income, or
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.
For purposes of this section—
Except 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).
Except as provided in regulations, the term “passive income” does not include any income—
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),
derived in the active conduct of an insurance business by a qualifying insurance corporation (as defined in subsection (f)),
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
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).
If 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—
held its proportionate share of the assets of such other corporation, and
received directly its proportionate share of the income of such other corporation.
For 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.
For purposes of this subsection, the term “qualified portion” means the portion of the shareholder’s holding period—
which is after
December 31, 1997
, and
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.
Except 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.
Subparagraph (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.
Paragraph (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.
The determination under subsection (a)(2) shall be made on the basis of the value of the assets of a foreign corporation if—
such corporation is a publicly traded corporation for the taxable year, or
paragraph (2) does not apply to such corporation for the taxable year.
The 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—
is a controlled foreign corporation, or
elects the application of this paragraph.
An election under subparagraph (B), once made, may be revoked only with the consent of the Secretary.
For 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 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
any exchange or other market which the Secretary determines has rules adequate to carry out the purposes of this subsection.
For purposes of subsection (b)(2)(B)—
The term “qualifying insurance corporation” means, with respect to any taxable year, a foreign corporation—
which would be subject to tax under subchapter L if such corporation were a domestic corporation, and
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.
If 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—
the percentage so determined for the corporation is at least 10 percent, and
under regulations provided by the Secretary, based on the applicable facts and circumstances—
the corporation is predominantly engaged in an insurance business, and
such failure is due solely to runoff-related or rating-related circumstances involving such insurance business.
For purposes of this subsection—
The term “applicable insurance liabilities” means, with respect to any life or property and casualty insurance business—
loss and loss adjustment expenses, and
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.
Any amount determined under clause (i) or (ii) of subparagraph (A) shall not exceed the lesser of such amount—
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
as determined under regulations prescribed by the Secretary.
For purposes of this subsection—
The term “applicable financial statement” means a statement for financial reporting purposes which—
is made on the basis of generally accepted accounting principles,
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
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).
The 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.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.1297-0 Table of contents
- Treas. Reg. §Treas. Reg. §1.1297-0(a) Scope.
- Treas. Reg. §Treas. Reg. §1.1297-0(b) Exclusion from passive income of active insurance income.
- Treas. Reg. §Treas. Reg. §1.1297-0(c) Exclusion of assets for purposes of the passive asset test under section 1297(a)(2).
- Treas. Reg. §Treas. Reg. §1.1297-0(d) Treatment of income and assets of certain look-through subsidiaries and look through partnerships for purposes of the section 1297(b)(2)(B) exception.
- Treas. Reg. §Treas. Reg. §1.1297-0(e) Qualifying domestic insurance corporation.
- Treas. Reg. §Treas. Reg. §1.1297-0(f) Applicability date.
- Treas. Reg. §Treas. Reg. §1.1297-0(g) Applicability date.
- Treas. Reg. §Treas. Reg. §1.1297-0(h) Applicability date.
- Treas. Reg. §Treas. Reg. §1.1297-0(i) Example 1: QIC holds all the stock of an investment subsidiary.
- Treas. Reg. §Treas. Reg. §1.1297-0(v) Options.
- Treas. Reg. §Treas. Reg. §1.1297-1 Definition of passive foreign investment company
- Treas. Reg. §Treas. Reg. §1.1297-1(a) Overview.
- Treas. Reg. §Treas. Reg. §1.1297-1(b) Dividends included in gross income—(1) General rule.
- Treas. Reg. §Treas. Reg. §1.1297-1(c) Passive income—(1) Foreign personal holding company income—(i) General rule.
- Treas. Reg. §Treas. Reg. §1.1297-1(d) Asset test—(1) Calculation of average annual value (or adjusted bases)—(i) General rule.
- Treas. Reg. §Treas. Reg. §1.1297-1(e) Stapled stock.
- Treas. Reg. §Treas. Reg. §1.1297-1(f) Definitions.
- Treas. Reg. §Treas. Reg. §1.1297-1(g) Applicability date—(1) In general.
- Treas. Reg. §Treas. Reg. §1.1297-1(v) Method of measuring assets—(A) Publicly traded foreign corporations.
- Treas. Reg. §Treas. Reg. §1.1297-2 Special rules regarding look-through subsidiaries and look-through partnerships
- Treas. Reg. §Treas. Reg. §1.1297-2(a) Overview.
- Treas. Reg. §Treas. Reg. §1.1297-2(b) General rules—(1) Tested foreign corporation's ownership of a corporation.
- Treas. Reg. §Treas. Reg. §1.1297-2(c) Elimination of certain intercompany assets and income—(1) General rule for asset test—(i) LTS stock.
- Treas. Reg. §Treas. Reg. §1.1297-2(d) Related person determination for purposes of section 1297(b)(2)(C)—(1) General rule.
3 Citing Cases
For example, the definition ofa PFIC (provided in section 1297) differs from the definition ofa RIC (provided in section 851) in key respects: In general, the PFIC provisions apply to a range ofinternational investment companies that is broader than the range ofdomestic investment companies to which the RIC provisions apply." As another example, the default rules ofsection 1291 do not provide for identical treatment ofPFICs and RICs. Among other differences, the entire amount ofgain on the sale
Respondent determined PFIC income and tax according to section 1291. Petitioners do not dispute the amount of PFIC income earned in the account but rather ask this Court to disallow the PFIC-related adjustments on the grounds that Xavana Establishment is properly classified as a CFC, therefore not subject to the PFIC-related adj
The Commissioner determined PFIC income and tax according to section 1291. Mr. Clemons does not dispute the Commissioner’s calculation of ordinary dividends. He argues that he may retroactively elect to have his PFIC income and tax determined according to section 1296. 18 [*18] By default, PFIC income is taxed according to section 1