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

Page 2417 TITLE 26—INTERNAL REVENUE CODE § 1297 2009, except as otherwise provided, see section 301(e) of Pub. L. 111–312, set out as an Effective and Termination Dates of 2010 Amendment note under section 121 of this title. EFFECTIVE DATE OF 2001 AMENDMENT Amendment by Pub. L. 107–16 applicable to estates of decedents dying after Dec. 31, 2009, see section 542(f)(1) of Pub. L. 107–16, set out as a note under section 121 of this title. EFFECTIVE DATE OF 1998 AMENDMENT Amendment by Pub. L. 105–206 effective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 6024 of Pub. L. 105–206, set out as a note under section 1 of this title. EFFECTIVE DATE Section applicable to taxable years of United States persons beginning after Dec. 31, 1997, and to taxable years of foreign corporations ending with or within such taxable years of United States persons, see section 1124 of Pub. L. 105–34, set out as an Effective Date of 1997 Amendment note under section 532 of this title. SUBPART D—GENERAL PROVISIONS Sec. 1297. Passive foreign investment company. 1298. Special rules. Editorial Notes AMENDMENTS 1997—Pub. L. 105–34, title XI, § 1122(a), (d)(5), Aug. 5, 1997, 111 Stat. 972, 977, redesignated subpart C of this part as this subpart and amended table of sections gen- erally, renumbering items 1296 and 1297 as 1297 and 1298, respectively. § 1297. Passive foreign investment company (a) In general For purposes of this part, except as otherwise provided in this subpart, the term ‘‘passive for- eign investment company’’ means any foreign corporation if— (1) 75 percent or more of the gross income of such corporation for the taxable year is pas- sive income, or (2) the average percentage of assets (as de- termined 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 income For purposes of this section— (1) In general Except as provided in paragraph (2), the term ‘‘passive income’’ means any income which is of a kind which would be foreign per- sonal holding company income as defined in section 954(c). (2) Exceptions Except as provided in regulations, the term ‘‘passive income’’ does not include any in- come— (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 in- surance 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 sec- tion 954(d)(3)) to the extent such amount is properly allocable (under regulations pre- scribed by the Secretary) to income of such related person which is not passive income, or (D) which is export trade income of an ex- port 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 sub- stituting ‘‘foreign corporation’’ for ‘‘con- trolled foreign corporation’’ each place it ap- pears in section 954(d)(3). (c) Look-thru in the case of 25-percent owned corporations If a foreign corporation owns (directly or indi- rectly) at least 25 percent (by value) of the stock of another corporation, for purposes of deter- mining whether such foreign corporation is a passive foreign investment company, such for- eign 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 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. (2) Qualified portion For 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 sec- tion 951(b)) of the corporation and the cor- poration is a controlled foreign corporation. (3) New holding period if qualified portion ends (A) In general Except as provided in subparagraph (B), if the qualified portion of a shareholder’s hold- ing 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) Exception Subparagraph (A) shall not apply if such stock was, with respect to such shareholder, stock in a passive foreign investment com- pany at any time before the qualified por- tion of the shareholder’s holding period with Page 2418 TITLE 26—INTERNAL REVENUE CODE § 1297 respect to such stock and no election under section 1298(b)(1) is made. (4) Treatment of holders of options Paragraph (1) shall not apply to stock treat- ed as owned by a person by reason of section 1298(a)(4) (relating to the treatment of a per- son that has an option to acquire stock as owning such stock) unless such person estab- lishes 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 value The 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 bases The determination under subsection (a)(2) shall be based on the adjusted bases (as deter- mined for the purposes of computing earnings and profits) of the assets of a foreign corpora- tion 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 para- graph. An election under subparagraph (B), once made, may be revoked only with the consent of the Secretary. (3) Publicly traded corporation For purposes of this subsection, a foreign corporation shall be treated as a publicly trad- ed 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 corporation For purposes of subsection (b)(2)(B)— (1) In general The term ‘‘qualifying insurance corpora- tion’’ 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 do- mestic 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 cor- poration’s applicable financial statement for the last year ending with or within the tax- able year. (2) Alternative facts and circumstances test for certain corporations 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— (A) the percentage so determined for the corporation is at least 10 percent, and (B) under regulations provided by the Sec- retary, based on the applicable facts and cir- cumstances— (i) the corporation is predominantly en- gaged in an insurance business, and (ii) such failure is due solely to runoff- related or rating-related circumstances in- volving such insurance business. (3) Applicable insurance liabilities For purposes of this subsection— (A) In general The term ‘‘applicable insurance liabil- ities’’ means, with respect to any life or property and casualty insurance business— (i) loss and loss adjustment expenses, and (ii) reserves (other than deficiency, con- tingency, or unearned premium reserves) for life and health insurance risks and life and health insurance claims with respect to contracts providing coverage for mor- tality or morbidity risks. (B) Limitations on amount of liabilities Any amount determined under clause (i) or (ii) of subparagraph (A) shall not exceed the lesser of such amount— (i) as reported to the applicable insur- ance regulatory body in the applicable fi- nancial statement described in paragraph (4)(A) (or, if less, the amount required by applicable law or regulation), or (ii) as determined under regulations pre- scribed by the Secretary. (4) Other definitions and rules For purposes of this subsection— (A) Applicable financial statement The term ‘‘applicable financial statement’’ means a statement for financial reporting purposes which— (i) is made on the basis of generally ac- cepted accounting principles, (ii) is made on the basis of international financial reporting standards, but only if there is no statement that meets the re- quirement 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 The term ‘‘applicable insurance regulatory body’’ means, with respect to any insurance business, the entity established by law to li- cense, authorize, or regulate such business and to which the statement described in sub- paragraph (A) is provided. Page 2419 TITLE 26—INTERNAL REVENUE CODE § 1297 (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; renum- bered § 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.) Editorial Notes REFERENCES IN TEXT Section 11A of the Securities and Exchange Act of 1934, referred to in subsec. (e)(3)(A), is classified to sec- tion 78k–1 of Title 15, Commerce and Trade. PRIOR PROVISIONS A prior section 1297 was renumbered section 1298 of this title. AMENDMENTS 2017—Subsec. (b)(2)(B). Pub. L. 115–97, § 14501(a), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: ‘‘derived in the active con- duct 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 if it were a domestic corporation,’’. Subsec. (f). Pub. L. 115–97, § 14501(b), added subsec. (f). 2007—Subsec. (b)(2)(D). Pub. L. 110–172, § 11(g)(18), which directed amendment of subpar. (D) by striking out ‘‘foreign trade income of a FSC or’’, was executed by striking out ‘‘foreign trade income of an FSC or’’ be- fore ‘‘export trade income’’ to reflect the probable in- tent of Congress. Subsecs. (d) to (f). Pub. L. 110–172, § 11(a)(24)(A), redes- ignated subsecs. (e) and (f) as (d) and (e), respectively, and struck out heading and text of former subsec. (d). Text read as follows: ‘‘For purposes of this part, the term ‘passive foreign investment company’ does not in- clude any foreign investment company to which sec- tion 1247 applies.’’ 1998—Subsec. (e). Pub. L. 105–206, § 6011(d), redesig- nated subsec. (e), relating to methods for measuring as- sets, as (f). Subsec. (e)(4). Pub. L. 105–206, § 6011(b)(1), added par. (4). Subsec. (f). Pub. L. 105–206, § 6011(d), redesignated sub- sec. (e), relating to methods for measuring assets, as (f). 1997—Pub. L. 105–34, § 1122(a), renumbered section 1296 of this title as this section. Subsec. (a). Pub. L. 105–34, § 1123(b)(2), struck out con- cluding provisions which read as follows: ‘‘In the case of a controlled foreign corporation (or any other for- eign corporation if such corporation so elects), the de- termination under paragraph (2) shall be based on the adjusted bases (as determined for purposes of com- puting earnings and profits) of its assets in lieu of their value. Such an election, once made, may be revoked only with the consent of the Secretary.’’ Subsec. (a)(2). Pub. L. 105–34, § 1123(b)(1), substituted ‘‘(as determined in accordance with subsection (e))’’ for ‘‘(by value)’’. Subsec. (b)(3). Pub. L. 105–34, § 1122(d)(4), struck out par. (3) which consisted of subpars. (A) to (C) relating to treatment of certain dealers in securities. Subsec. (e). Pub. L. 105–34, § 1123(a), added subsec. (e) relating to methods for measuring assets. Pub. L. 105–34, § 1121, added subsec. (e) relating to ex- ception for United States shareholders of controlled foreign corporations. 1996—Subsec. (b)(2)(D). Pub. L. 104–188 added subpar. (D). 1993—Subsec. (a). Pub. L. 103–66, § 13231(d)(1), sub- stituted in closing provisions ‘‘In the case of a con- trolled foreign corporation (or any other foreign cor- poration if such corporation so elects), the determina- tion under paragraph (2) shall be based on the adjusted bases (as determined for purposes of computing earn- ings and profits) of its assets in lieu of their value. Such an election, once made, may be revoked only with the consent of the Secretary.’’ for ‘‘A foreign corpora- tion may elect to have the determination under para- graph (2) based on the adjusted bases of its assets in lieu of their value. Such an election, once made, may be revoked only with the consent of the Secretary.’’ Subsec. (b)(3). Pub. L. 103–66, § 13231(d)(3), added par. (3). 1988—Subsec. (a). Pub. L. 100–647, § 1018(u)(40), inserted a comma after ‘‘subpart’’. Pub. L. 100–647, § 1012(p)(27), inserted at end ‘‘A for- eign corporation may elect to have the determination under paragraph (2) based on the adjusted bases of its assets in lieu of their value. Such an election, once made, may be revoked only with the consent of the Secretary.’’ Subsec. (b)(1). Pub. L. 100–647, § 1012(p)(5), amended par. (1) generally. Prior to amendment, par. (1) read as follows: ‘‘Except as provided in paragraph (2), the term ‘passive income’ has the meaning given such term by section 904(d)(2)(A) without regard to the exceptions contained in clause (iii) thereof.’’ Subsec. (b)(2). Pub. L. 100–647, § 1012(p)(26), substituted ‘‘Exceptions’’ for ‘‘Exception for certain banks and in- surance companies’’ in heading, and inserted sentence at end defining ‘‘related person’’. Subsec. (b)(2)(B). Pub. L. 100–647, § 1012(p)(16), inserted ‘‘is predominantly engaged in an insurance business and which’’ after ‘‘a corporation which’’. Subsec. (b)(2)(C). Pub. L. 100–647, § 1012(p)(26)(A), added subpar. (C). Subsec. (c). Pub. L. 100–647, § 1012(p)(2), inserted ‘‘(di- rectly or indirectly)’’ after ‘‘foreign corporation owns’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Pub. L. 115–97, title I, § 14501(c), Dec. 22, 2017, 131 Stat. 2235, provided that: ‘‘The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 2017.’’ EFFECTIVE DATE OF 1998 AMENDMENT Amendment by Pub. L. 105–206 effective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 6024 of Pub. L. 105–206, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 applicable to taxable years of United States persons beginning after Dec. 31, 1997, and to taxable years of foreign corporations end- ing with or within such taxable years of United States persons, see section 1124 of Pub. L. 105–34, set out as a note under section 532 of this title. EFFECTIVE DATE OF 1996 AMENDMENT Pub. L. 104–188, title I, § 1704(r)(2), Aug. 20, 1996, 110 Stat. 1887, provided that: ‘‘The amendments made by paragraph (1) [amending this section] shall take effect as if included in the amendments made by section 1235 of the Tax Reform Act of 1986 [Pub. L. 99–514].’’ EFFECTIVE DATE OF 1993 AMENDMENT Amendment by Pub. L. 103–66 applicable to taxable years of foreign corporations beginning after Sept. 30, 1993, and to taxable years of United States shareholders in which or with which such taxable years of foreign Page 2420 TITLE 26—INTERNAL REVENUE CODE § 1298 corporations end, see section 13231(e) of Pub. L. 103–66, set out as a note under section 951 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE Section applicable to taxable years of foreign cor- porations beginning after Dec. 31, 1986, see section 1235(h) of Pub. L. 99–514, set out as a note under section 1291 of this title. § 1298. Special rules (a) Attribution of ownership For purposes of this part— (1) Attribution to United States persons This subsection— (A) shall apply to the extent that the ef- fect is to treat stock of a passive foreign in- vestment company as owned by a United States person, and (B) except to the extent provided in regu- lations, 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 If 50 percent or more in value of the stock of a corporation is owned, directly or indi- rectly, 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 cor- poration. (B) 50-percent limitation not to apply to PFIC For 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 com- pany, 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 con- sidered as being owned proportionately by its partners or beneficiaries. (4) Options To 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 op- tion 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 application Stock considered to be owned by a person by reason of the application of paragraph (2), (3), or (4) shall, for purposes of applying such para- graphs, be considered as actually owned by such person. (b) Other special rules For purposes of this part— (1) Time for determination Stock 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 cor- poration (or any predecessor) was a passive foreign investment company which was not a qualified electing fund. The preceding sen- tence 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 pas- sive 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 year A corporation shall not be treated as a pas- sive foreign investment company for the first taxable year such corporation has gross in- come (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 for- eign investment company for either of the 1st 2 taxable years following the start-up year. (3) Certain corporations changing businesses A corporation shall not be treated as a pas- sive foreign investment company for any tax- able year if— (A) neither such corporation (nor any pred- ecessor) 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 in- come 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 pas- sive foreign investment company for ei- ther of the 1st 2 taxable years following such taxable year, and (C) such corporation is not a passive for- eign investment company for either of such 2 taxable years. (4) Separate interests treated as separate cor- porations Under regulations prescribed by the Sec- retary, where necessary to carry out the pur- poses of this part, separate classes of stock (or other interests) in a corporation shall be treated as interests in separate corporations.