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

(a) In general For purposes of this part, except as otherwise provided in this subpart, the term “passive foreign investment company” means any foreign corporation if—

NOT“except as otherwise provided in this subpart,” Opening words

“any foreign corporation” Opening words

Textual readingANY OF= a passive foreign investment company

(1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or

Cited by 21

(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.

Amended 1997

1997 Pub. L. 105-34 Pub. L. 105–34, § 1123(b)(1), substituted “(as determined in accordance with subsection (e))” for “(by value)”.

Cited by 29

Amended 1988, 1993, 1997

1997 Pub. L. 105-34 Pub. L. 105–34, § 1123(b)(2), struck out concluding provisions which read as follows: “In the case of a controlled foreign corporation (or any other foreign corporation if such corporation so elects), the determination under paragraph (2) shall be based on the adjusted bases (as determined for purposes of computing 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.”
1993 Pub. L. 103-66 Pub. L. 103–66, § 13231(d)(1), substituted in closing provisions “In the case of a controlled foreign corporation (or any other foreign corporation if such corporation so elects), the determination under paragraph (2) shall be based on the adjusted bases (as determined for purposes of computing 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.” for “A foreign 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.”
1988 Pub. L. 100-647 Pub. L. 100–647, § 1018(u)(40), inserted a comma after “subpart”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(p)(27), inserted at end “A foreign 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.”

Cases: Toso v. Commissioner, 151 T.C. No. 4 (2018)

Cited by 28

(b) Passive income For purposes of this section—

Amended 1993, 1997

1997 Pub. L. 105-34 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.
1993 Pub. L. 103-66 Pub. L. 103–66, § 13231(d)(3), added par. (3).

Cited by 2

(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 personal holding company income as defined in section 954(c).

Amended 1988

1988 Pub. L. 100-647 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.”

Cited by 2

(2) Exceptions Except as provided in regulations, the term “passive income” does not include any income—

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(p)(26), substituted “Exceptions” for “Exception for certain banks and insurance companies” in heading, and inserted sentence at end defining “related person”.

Cited by 4

(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),

Cited by 1

(B) derived in the active conduct of an insurance business by a qualifying insurance corporation (as defined in subsection (f)),

Amended 1988, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14501(a), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: “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 if it were a domestic corporation,”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(p)(16), inserted “is predominantly engaged in an insurance business and which” after “a corporation which”.

Cited by 11

(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

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(p)(26)(A), added subpar. (C).

Cited by 18

(D) which is export trade income of an export trade corporation (as defined in section 971).

Amended 1996, 2007

2007 Pub. L. 110-172 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” before “export trade income” to reflect the probable intent of Congress.
1996 Pub. L. 104-188 Pub. L. 104–188 added subpar. (D).

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 corporations 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—

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1012(p)(2), inserted “(directly or indirectly)” after “foreign corporation owns”.

Cited by 35

(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.

Cited by 2

(d) Exception for United States shareholders of controlled foreign corporations

Amended 2007

2007 Pub. L. 110-172 Pub. L. 110–172, § 11(a)(24)(A), redesignated 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 include any foreign investment company to which section 1247 applies.”

Cited by 1

(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.

Cited by 1

(2) Qualified portion For purposes of this subsection, the term “qualified portion” means the portion of the shareholder’s holding period—

“the portion of the shareholder’s holding period—” Opening words

Textual readingALL OF= the qualified portion of 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 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.

Cited by 1

(B) Exception 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.

Textual readingALL OF= subparagraph (A) does not apply

“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”

“no election under section 1298(b)(1) is made”

Cited by 1

(4) Treatment of holders of options 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.

(e) Methods for measuring assets

Amended 1997, 1998, 2007

2007 Pub. L. 110-172 Pub. L. 110–172, § 11(a)(24)(A), redesignated 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 include any foreign investment company to which section 1247 applies.”
1998 Pub. L. 105-206 Pub. L. 105–206, § 6011(d), redesignated subsec. (e), relating to methods for measuring assets, as (f).
1998 Pub. L. 105-206 Pub. L. 105–206, § 6011(b)(1), added par. (4).
1997 Pub. L. 105-34 Pub. L. 105–34, § 1123(a), added subsec. (e) relating to methods for measuring assets.
1997 Pub. L. 105-34 Pub. L. 105–34, § 1121, added subsec. (e) relating to exception for United States shareholders of controlled foreign corporations.

Cited by 11

(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

Cited by 1

(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 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—

Cited by 4

(A) is a controlled foreign corporation, or

Cited by 1

(B) elects the application of this paragraph.

Cited by 4

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 traded corporation if the stock in the corporation is regularly traded on—

Cited by 2

(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)—

Amended 1998, 2007, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 14501(b), added subsec. (f).
2007 Pub. L. 110-172 Pub. L. 110–172, § 11(a)(24)(A), redesignated 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 include any foreign investment company to which section 1247 applies.”
1998 Pub. L. 105-206 Pub. L. 105–206, § 6011(d), redesignated subsec. (e), relating to methods for measuring assets, as (f).

Cited by 5

(1) In general The term “qualifying insurance corporation” means, with respect to any taxable year, a foreign corporation—

Cited by 1

(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.

Cited by 2

(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—

Cited by 6

(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 liabilities For purposes of this subsection—

(A) In general The term “applicable insurance liabilities” means, with respect to any life or property and casualty insurance business—

Cited by 1

(i) loss and loss adjustment expenses, and

Cited by 1

(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.

Cited by 1

(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 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.