Par. 4. Section 1.1297-4 is added to read as follows:
(a) General rules. For purposes of part VI of subchapter P, chapter 1 of the Code, a foreign employer that is not a controlled foreign corporation is not treated as the owner of any portion of a foreign employees' trust (as defined in Sec. 1.671-1(h)(2)) except as provided in this paragraph (a), regardless of whether the employer has a power or interest described in sections 673 through 677 over any portion of the trust.
(1) Principal purpose to avoid classification as a passive foreign investment company. If a principal purpose for a transfer of property by any person to a foreign employees' trust (as defined in Sec. 1.671- 1(h)(2)) is to avoid classification of a foreign corporation as a passive foreign investment company, then the following rule applies. If the foreign employer has a power or interest described in sections 673 through 677 over the trust, then the grantor trust rules of subpart E of part I of subchapter J, chapter 1 of the Code will apply, for purposes of part VI of subchapter P, to a fixed dollar amount in the trust that is equal to the fair market value of the property that is transferred for the purpose of avoiding classification as a passive foreign investment company. Whether a principal purpose for a transfer is the avoidance of classification as a passive foreign investment company will be determined on the basis of all of the facts and circumstances, including whether the amount of assets held by the foreign employees' trust is reasonably related to the plan's anticipated liabilities, taking into account any local law and practice relating to proper funding levels.
(2) Principal purpose to reduce or eliminate taxation under section 1291 or 1293. If a principal purpose for a transfer of property by any person to a foreign employees' trust (as defined in Sec. 1.671-1(h)(2)) is to reduce or eliminate taxation under section 1291 or 1293, then the following rule applies. If the foreign employer has a power or interest described in sections 673 through 677 over the trust, then the provisions of subpart E will apply, for purposes of part VI of subchapter P, to a fixed dollar amount in the trust that is equal to the fair market value of the property transferred for the purpose of reducing or eliminating taxation under section 1291 or 1293. Whether a principal purpose for a transfer is to reduce or eliminate taxation under section 1291 or 1293 will be determined on the basis of all the facts and circumstances, including whether the amount of assets held by the foreign employees' trust is reasonably related to the plan's anticipated liabilities, taking into account any local law and practice relating to proper funding levels.
(3) Application to employer entity. The rules of this section apply to the employer whose employees benefit under the deferred compensation plan funded through the foreign employees' trust, or, in the case of a deferred compensation plan covering independent contractors, the recipient of services performed by those independent contractors, regardless of whether the plan is maintained through another entity. Thus, for example, where a deferred compensation plan benefitting employees of a foreign
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employer that is not a controlled foreign corporation is funded through a foreign employees' trust, the foreign employer is considered to be the grantor of the foreign employees' trust for purposes of this paragraph (a).
(b) Effective date. This section applies to taxable years of a foreign corporation ending after September 27, 1996.