[Federal Register Volume 80, Number 79 (Friday, April 24, 2015)]
[Proposed Rules]
[Pages 22954-22956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-09630]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-108214-15]
RIN 1545-BM69


Exception From Passive Income for Certain Foreign Insurance 
Companies

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide 
guidance regarding when a foreign insurance company's income is 
excluded from the definition of passive income under section 
1297(b)(2)(B). The proposed regulations affect the U.S. shareholders of 
foreign corporations. This document also invites comments from the 
public on all aspects of the proposed rules and provides the 
opportunity for the public to request a public hearing.

DATES: Written or electronic comments and requests for a public hearing 
must be received by July 23, 2015.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-108214-15), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
108214-15), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-108214-15).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Josephine Firehock, (202) 317-4932; concerning submissions of comments 
or requests for a public hearing, Oluwafunmilayo (Funmi) Taylor at 
(202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    The Department of Treasury (Treasury) and the IRS are aware of 
situations in which a hedge fund establishes a purported foreign 
reinsurance company in order to defer and reduce the tax that otherwise 
would be due with respect to investment income. Such foreign 
corporations may be Passive Foreign Investment Companies (PFICs). For a 
description of the recent trends and legislative proposals to address 
the issue, see ``Background and Data with Respect to Hedge Fund 
Reinsurance Arrangements,'' JCT (July 31, 2014) (2014 JCT Report); see 
also Notice 2003-34, 2003-23 IRB 990 (May 9, 2003).
    Under section 1297 of the Internal Revenue Code (Code), a foreign 
corporation is a PFIC if either 75 percent or more of its gross income 
for the taxable year is passive income (``passive income test''), or on 
average 50 percent or more of its assets produce passive income or are 
held for the production of passive income (``passive asset test''). 
Section 1297(b)(1) generally defines the term ``passive income'' to 
mean any income of a kind that would be ``foreign personal holding 
company income'' as defined in section 954(c). In general, an asset is 
characterized as passive if it generates (or is reasonably expected to 
generate in the reasonably foreseeable future) passive income as 
defined in section 1297(b). Assets that generate both passive and non-
passive income in a taxable year are treated as partly passive and 
partly non-passive assets in proportion to the relative amounts of 
income generated by those assets in that year. See Notice 88-22, 1988-1 
CB 489 (February 26, 1988).
    For purposes of applying the passive income test, section 
1297(b)(2)(B) provides that, except as provided in regulations, the 
term ``passive income'' does not include any income that is derived in 
the active conduct of an insurance business by a corporation which is 
predominantly engaged in an insurance business and which would be 
subject to tax under subchapter L as an insurance company if the 
corporation were a domestic corporation. As the terms ``active 
conduct'' and ``insurance business'' are not defined in section 1297, 
Treasury and the IRS are proposing regulations to clarify the 
circumstances under which investment income earned by a foreign 
insurance company is derived in the active conduct of an insurance 
business for purposes of determining whether the income is passive 
income, and thus the extent to which the company's assets are treated 
as passive assets for purposes of determining whether the company is a 
PFIC.
    The proposed regulations provide that the term ``active conduct'' 
has the same meaning as in Sec.  1.367(a)-2T(b)(3), except that 
officers and employees are not considered to include the officers and 
employees of related entities. The proposed regulations define the term 
``insurance business'' to mean the business activity of issuing 
insurance and annuity contracts and the reinsuring of risks 
underwritten by insurance companies, together with investment 
activities and administrative services that are required to support or 
are substantially related to insurance contracts issued or reinsured by 
the foreign insurance company.\1\ The regulations also provide that an

[[Page 22955]]

investment activity is any activity engaged in to produce income of a 
kind that would be foreign personal holding company income as defined 
in section 954(c). The proposed regulations further provide that 
investment activities will be treated as required to support or as 
substantially related to insurance or annuity contracts issued or 
reinsured by the foreign corporation to the extent that income from the 
activities is earned from assets held by the foreign corporation to 
meet obligations under the contracts.
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    \1\ Cf. Committee on Ways and Means U.S. House of 
Representatives, Supplemental Report, The Deficit Reduction Act of 
1984, 98th Cong. 2d Sess., H.R. Rept. 98-432, part 2, at 531 (Mar. 
5, 1984); Committee on Finance United States Senate, The Deficit 
Reduction Act of 1984, S. Rept. 98-169, vol. 1, at 1407-08 (April 2, 
1984); H.R. Rept. 98-861, 98th Cong. 2d Sess. at 1045 (June 23, 
1984) (Conference Report).
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    The proposed regulations do not set forth a method to determine the 
portion of assets held to meet obligations under insurance and annuity 
contracts. Comments are requested on appropriate methodologies for 
determining the extent to which assets are held to meet obligations 
under insurance and annuity contracts.
    The proposed regulations also do not define what it means to be 
``predominantly engaged'' in an insurance business. Prior to 1984, the 
Code did not define an insurance company. Section 1.801-3(a) of the 
regulations, however, provides in relevant part that an insurance 
company is a company whose primary and predominant business activity 
during the taxable year is the issuing of insurance or annuity 
contracts or the reinsuring of risks underwritten by insurance 
companies.
    In 1984, Congress enacted a definition of an ``insurance company'' 
that applied only to life insurance companies, and in 2004, a 
conforming amendment was made to apply the same definition to non-life 
insurance companies. See sections 816(a) and 831(c). Under this 
definition, in order for a corporation to be subject to tax as an 
insurance company under subchapter L, more than half of its business 
during the taxable year is required to be the issuing of insurance or 
annuity contracts or the reinsuring of risks underwritten by insurance 
companies. By requiring that more than half of the company's business 
activity, rather than its predominant business activity, be insurance 
activity, the current subchapter L statutory rules adopt a stricter and 
more precise standard than the ``primary and predominant'' regulatory 
standard under prior law.\2\ Thus, any company taxable under subchapter 
L as an insurance company is necessarily predominantly engaged in an 
insurance business for purposes of section 1297(a)(2)(B).
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    \2\ Committee on Ways and Means U.S. House of Representatives, 
Supplemental Report, The Deficit Reduction Act of 1984, 98th Cong. 
2d Sess., H.R. Rept. 98-432, part 2, at 1402-3 (March 5, 1984); 
Committee on Finance United States Senate, The Deficit Reduction Act 
of 1984, 98th Cong. 2d Sess., S. Rpt. 98-169, vol. 1, at 525-6 
(April 2, 1984); Committee on Ways and Means U.S. House of 
Representatives, Supplemental Report, The Deficit Reduction Act of 
1984, 98th Cong. 2d Sess., H.R. Rept. 98-432, part 2, at 1042-2 
(March 5, 1984) (Conference Report); H.R. Rept. 108-457, Pension 
Funding Equity Act of 2004, 108th Cong. 2d Sess. at 52-53 (April 1, 
2004).
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Proposed Effective/Applicability Date

    These regulations are proposed to apply on the date of publication 
of the Treasury decision adopting these rules as final regulations in 
the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. Chapter 5) 
does not apply to these regulations, and because the regulations do not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 
section 7805(f) of the Code, this notice of proposed rulemaking has 
been submitted to the Chief Counsel of Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under ``Addresses.'' Treasury 
and the IRS request comments on all aspects of the proposed rules. 
Comments specifically are requested with regard to how to determine the 
portion of a foreign insurance company's assets that are held to meet 
obligations under insurance contracts issued or reinsured by the 
company. For example, assets could be considered as held to meet 
obligations under insurance or annuity contracts issued or reinsured by 
the corporation to the extent the corporation's assets in the calendar 
year do not exceed a specified percentage of the corporation's total 
insurance liabilities for the year (for example, the sum of the 
corporation's ``total reserves'' (as defined in section 816(c)) plus 
(to the extent not included in total reserves) the items referred to in 
paragraphs (3), (4), (5), and (6) of section 807(c)). Comments are 
requested with regard to what percentage would be appropriate. Also, 
comments are requested with regard to whether other methods would be 
more appropriate to determine the portion of assets that are held to 
meet obligations under insurance and annuity contracts.
    All comments will be available at www.regulations.gov or upon 
request. A public hearing will be scheduled if requested in writing by 
any person that timely submits comments. If a public hearing is 
scheduled, notice of the date, time, and place for the public hearing 
will be published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Josephine 
Firehock of the Office of Associate Chief Counsel (International). 
However, other personnel from the IRS and the Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Par. 1. The authority citation for part 1 is amended by adding an entry 
in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *

    Section 1.1297-4 is also issued under 26 U.S.C. 1297(b)(2)(B) 
and 1298(g).

0
Par. 2. Section 1.1297-4 is added to read as follows:


Sec.  1.1297-4  Exception from the definition of passive income for 
certain foreign insurance company income.

    (a) Income derived in the active conduct of an insurance business. 
For purposes of section 1297, the term passive income does not include 
income earned by a foreign corporation that would be subject to tax 
under subchapter L if it were a domestic corporation, but only to the 
extent the income is derived in the active conduct of an insurance 
business.
    (b) Definitions. The following definitions apply for purposes of 
paragraph (a) of this section--
    (1) Active conduct. The term active conduct has the same meaning as 
in Sec.  1.367(a)-2T(b)(3), except that officers and employees are not 
considered to

[[Page 22956]]

include the officers and employees of related entities as provided in 
Sec.  1.367(a)-2T(b)(3).
    (2) Insurance business. The term insurance business means the 
business of issuing insurance and annuity contracts and the reinsuring 
of risks underwritten by insurance companies, together with those 
investment activities and administrative services that are required to 
support or are substantially related to insurance and annuity contracts 
issued or reinsured by the foreign corporation. For purposes of the 
preceding sentence--
    (i) An investment activity is any activity engaged in by the 
foreign corporation to produce income of a kind that would be foreign 
personal holding company income as defined in section 954(c); and
    (ii) Investment activities are required to support or are 
substantially related to insurance and annuity contracts issued or 
reinsured by the foreign corporation to the extent that income from the 
activities is earned from assets held by the foreign corporation to 
meet obligations under the contracts.
    (c) Effective/applicability date. These regulations apply beginning 
[EFFECTIVE DATE OF FINAL RULE].

John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-09630 Filed 4-23-15; 8:45 am]
 BILLING CODE 4830-01-P