1. Adding a sectional authority for § 1.953-3 in numerical order;
Par. 4. Section 1.953-3 is revised to read as follows:
(a) [Reserved]
(b) Related person insurance income —(1) Definition of related person insurance income —(i) In general. Insurance income under section 953(a) includes related person insurance income under section 953(c)(2). Related person insurance income is premium and investment income attributable to an annuity, insurance, or reinsurance policy that directly or indirectly provides coverage to a related insured as defined in paragraph (b)(1)(ii) of this section. For purposes of this section, the terms United States shareholder and controlled foreign corporation have the meaning provided in section 953(c)(1).
(ii) Related insured. Except as provided in paragraph (b)(5)(ii) of this section, with respect to a foreign corporation, a related insured means any of the following—
(A) A United States shareholder of the foreign corporation;
(B) A person that is related to a United States shareholder within the meaning of section 953(c)(6);
(C) A pass-through entity, if a related insured (other than a pass-through entity) owns stock in the foreign corporation indirectly (within the meaning of section 958(a)) through the pass-through entity; or
(D) A person (other than a publicly traded corporation or publicly traded partnership) that is more than 50 percent owned by United States shareholders of the foreign corporation as described in paragraph (b)(1)(v) of this section.
(iii) Amount treated as related person insurance income with respect to a pass-through entity —(A) In general. In the case of a pass-through entity that is a related insured, the amount treated as related person insurance income is equal to the insurance income attributable to the policy that directly or indirectly provides coverage to the pass-through entity multiplied by the fraction described in paragraph (b)(1)(iii)(B) of this section.
(B) Fraction. The fraction described in this paragraph (b)(1)(iii)(B) is equal to—
( 1 ) The total amount of premiums paid or accrued by the pass-through entity for the policy that is allocated (directly or indirectly, through one or more pass-through entities) to all related insureds (other than pass-through entities); divided by
( 2 ) The total amount of premiums paid or accrued by the pass-through entity for the policy.
(C) Allocation —( 1 ) Partnerships. For purposes of paragraph (b)(1)(iii)(B) of this section, the total amount of premiums paid or accrued by a partnership that is allocated to the related insureds is determined in accordance with the partnership agreement and section 704(b).
( 2 ) S corporations. For purposes of paragraph (b)(1)(iii)(B) of this section, the total amount of premiums paid or accrued by an S corporation that is allocated to the related insureds is determined on a pro rata basis.
(iv) Pass-through entities. For purposes of paragraph (b)(1) of this section, a pass-through entity is an S corporation or a domestic or foreign partnership (other than a publicly traded partnership).
(v) Ownership. The ownership threshold described in paragraph (b)(1)(ii)(D) of this section is met if United States shareholders collectively own (after applying the principles of section 958(a) and (b)) more than 50 percent of the stock in a corporation (by vote or value), more than 50 percent of the capital or profits interests in a partnership, or more than 50 percent of the interests in a trust or estate.
(vi) Stock owned through domestic partnerships or S corporations. See § 1.958-1(d) for rules regarding the ownership of stock of a foreign corporation through a domestic partnership or S corporation for purposes of section 953(c) and for purposes of any provision that specifically applies by reference to section 953(c) or the regulations in this part under section 953 that relate to section 953(c).
(vii) Examples. The following examples illustrate the rules of paragraph (b)(1) of this section.
(A) Example 1 —( 1 ) Facts. FC is a foreign corporation engaged in the insurance business. FC is wholly owned by FP, a foreign partnership. DC, a domestic corporation, owns 25% of the interests in FP. The remaining interests in FP are held by unrelated foreign corporations. Under the partnership agreement, all items of income, gain, loss, deduction, and credit are allocated 25% to DC and 75% to the other partners. In Year 1, FC issues the FP policy, under which FP is insured. FP pays a premium of $80 for the FP policy. The insurance income attributable to the FP policy (including both premium and investment income) is $100. FC earns an additional $1,000 of income that is treated as related person insurance income. Under section 704(b), DC would be allocated $20 (25%) of the premium paid or accrued by FP.
( 2 ) Result. Under paragraph (b)(1)(ii)(C) of this section, FP is treated as a related insured with respect to FC because it is a pass-through entity through which DC indirectly owns stock in FC. Therefore, under paragraph (b)(1)(i) of this section, a portion of the insurance income attributable to the FP policy is treated as related person insurance income. Under paragraph (b)(1)(iii)(A) of this section, the amount of related person insurance income with respect to FP is equal to the insurance income attributable to the FP policy ($100) multiplied by the fraction described in paragraph (b)(1)(iii)(B) of this section. That fraction is equal to the portion of the premium paid by FP that is allocable to DC ($20) divided by the total premium paid by FP ($80), or 25%. Therefore, FC has $25 of related person insurance income under section 953(c)(2) attributable to the FP policy in Year 1.
(B) Example 2 —( 1 ) Facts. FC is a foreign corporation engaged in the insurance business. Two domestic corporations, DC1 and DC2, each own 50% of the stock of FC. In addition, DC1 and DC2 each own 50% of the stock in DC3, a domestic corporation. In Year 1, FC issues the DC3 policy, under which DC3 is insured. The insurance income attributable to the DC3 policy is $100. FC earns an additional $1,000 of income that is treated as related person insurance income.
( 2 ) Result. DC3 meets the requirements of paragraph (b)(1)(v) of this section because United States shareholders of FC (DC1 and DC2) collectively own all the stock of DC3. Therefore, under paragraph (b)(1)(ii)(D) of this section, DC3 is treated as a related insured with respect to FC. Consequently, under paragraph (b)(1)(i) of this section, all of FC's $100 of insurance income attributable to the DC3 policy is treated as related person insurance income under section 953(c)(2).
(2) through (4) [Reserved]
(5) Cross-insurance arrangements —(i) In general. Related person insurance income includes insurance income attributable to an arrangement (or a substantially similar arrangement with a similar degree of cooperative risk sharing) whereby a foreign corporation issues an insurance, reinsurance, or annuity contract to a person other than a related insured and, as part of the arrangement (involving one or more other persons), another person issues an insurance, reinsurance, or annuity contract to a related insured of the foreign corporation.
(ii) Related insured. For purposes of applying paragraph (b)(5)(i) of this section before the applicability date described in paragraph (c)(1) of this section, the term related insured means, with respect to a foreign corporation, a United States shareholder of the foreign corporation or a person that is related to a United States shareholder within the meaning of section 953(c)(6).
(iii) Example. Controlled foreign corporation X is owned by 30 unrelated United States shareholders. Controlled foreign corporation Y is owned by 30 unrelated United States shareholders (that is, unrelated to X and Y and the shareholders of X and Y). X agrees to provide insurance protection to Y's shareholders, and Y agrees to provide insurance to X's shareholders. The insurance income of both X and Y that is attributable to insuring the shareholders of the other corporation constitutes related person insurance income.
(c) Applicability date —(1) In general. Paragraph (b)(1) of this section applies to taxable years of foreign corporations beginning on or after [date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register ], and to taxable years of United States persons in which or with which such taxable years of foreign corporations end.
(2) Cross-insurance rule. Paragraph (b)(5) of this section applies to taxable years of foreign corporations ending on or after January 24, 2022, and to taxable years of United States persons in which or with which such taxable years of foreign corporations end (in each case without regard to when the arrangement was entered into).