Subpart C—General Provisions
§1296. 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—
(1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or
(2) the average percentage of assets (by value) 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.
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.
(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 personal holding company income as defined in section 954(c).
(2) Exceptions
Except as provided in regulations, the term "passive income" does not include any income—
(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 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, or
(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.
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).
(3) Treatment of certain dealers in securities
(A) In general
In the case of any foreign corporation which is a controlled foreign corporation (as defined in section 957(a)), the term "passive income" does not include any income derived in the active conduct of a securities business by such corporation if such corporation is registered as a securities broker or dealer under section 15(a) of the Securities Exchange Act of 1934 or is registered as a Government securities broker or dealer under section 15C(a) of such Act. To the extent provided in regulations, such term shall not include any income derived in the active conduct of a securities business by a controlled foreign corporation which is not so registered.
(B) Application of look-thru rules
For purposes of paragraph (2)(C), rules similar to the rules of subparagraph (A) of this paragraph shall apply in determining whether any income of a related person (whether or not a corporation) is passive income.
(C) Limitation
The preceding provisions of this paragraph shall only apply in the case of persons who are United States shareholders (as defined in section 951(b)) in the controlled foreign corporation.
(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—
(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) Section 1247 corporations
For purposes of this part, the term "passive foreign investment company" does not include any foreign investment company to which section 1247 applies.
(Added
References in Text
Sections 15(a) and 15C(a) of the Securities Exchange Act of 1934, referred to in subsec. (b)(3)(A), are classified to sections 78o(a) and 78o–5(a), respectively, of Title 15, Commerce and Trade.
Amendments
1993—Subsec. (a).
Subsec. (b)(3).
1988—Subsec. (a).
Subsec. (b)(1).
Subsec. (b)(2).
Subsec. (b)(2)(B).
Subsec. (b)(2)(C).
Subsec. (c).
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date
Section applicable to taxable years of foreign corporations beginning after Dec. 31, 1986, see section 1235(h) of
Section Referred to in Other Sections
This section is referred to in
§1297. 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 effect is to treat stock of a passive foreign investment company as owned by a United States person, and
(B) except to the extent provided in regulations, 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 indirectly, 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 corporation.
(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 company, subparagraph (A) shall be applied without regard to the 50-percent limitation contained therein.
(3) Partnerships, etc.
Stock owned, directly or indirectly, by or for a partnership, estate, or trust shall be considered 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 option 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 paragraphs, 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 corporation (or any predecessor) was a passive foreign investment company which was not a qualified electing fund. The preceding sentence 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 passive foreign investment company) 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 passive foreign investment company for the first taxable year such corporation has gross income (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 foreign 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 passive foreign investment company for any taxable year if—
(A) neither such corporation (nor any predecessor) 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 income 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 passive foreign investment company for either of the 1st 2 taxable years following such taxable year, and
(C) such corporation is not a passive foreign investment company for either of such 2 taxable years.
(4) Separate interests treated as separate corporations
Under regulations prescribed by the Secretary, where necessary to carry out the purposes of this part, separate classes of stock (or other interests) in a corporation shall be treated as interests in separate corporations.
(5) Application of part where stock held by other entity
(A) In general
Under regulations, in any case in which a United States person is treated as owning stock in a passive foreign investment company by reason of subsection (a)—
(i) any disposition by the United States person or the person owning such stock which results in the United States person being treated as no longer owning such stock, or
(ii) any distribution of property in respect of such stock to the person holding such stock,
shall be treated as a disposition by, or distribution to, the United States person with respect to the stock in the passive foreign investment company.
(B) Amount treated in same manner as previously taxed income
Rules similar to the rules of section 959(b) shall apply to any amount described in subparagraph (A) and to any amount included in gross income under section 1293(a) (or which would have been so included but for section 951(f)) in respect of stock which the taxpayer is treated as owning under subsection (a).
(6) Dispositions
Except as provided in regulations, if a taxpayer uses any stock in a passive foreign investment company as security for a loan, the taxpayer shall be treated as having disposed of such stock.
(7) Coordination with section 1246
Section 1246 shall not apply to earnings and profits of any company for any taxable year beginning after December 31, 1986, if such company is a passive foreign investment company for such taxable year.
(8) Treatment of certain foreign corporations owning stock in 25-percent owned domestic corporation
(A) In general
If—
(i) a foreign corporation is subject to the tax imposed by section 531 (or waives any benefit under any treaty which would otherwise prevent the imposition of such tax), and
(ii) such foreign corporation owns at least 25 percent (by value) of the stock of a domestic corporation,
for purposes of determining whether such foreign corporation is a passive foreign investment company, any qualified stock held by such domestic corporation shall be treated as an asset which does not produce passive income (and is not held for the production of passive income) and any amount included in gross income with respect to such stock shall not be treated as passive income.
(B) Qualified stock
For purposes of subparagraph (A), the term "qualified stock" means any stock in a C corporation which is a domestic corporation and which is not a regulated investment company or real estate investment trust.
(9) Treatment of certain subpart F inclusions
Any amount included in gross income under subparagraph (B) or (C) of section 951(a)(1) shall be treated as a distribution received with respect to the stock.
(c) Treatment of stock held by pooled income fund
If stock in a passive foreign investment company is owned (or treated as owned under subsection (a)) by a pooled income fund (as defined in section 642(c)(5)) and no portion of any gain from a disposition of such stock may be allocated to income under the terms of the governing instrument of such fund—
(1) section 1291 shall not apply to any gain on a disposition of such stock by such fund if (without regard to section 1291) a deduction would be allowable with respect to such gain under section 642(c)(3),
(2) section 1293 shall not apply with respect to such stock, and
(3) in determining whether section 1291 applies to any distribution in respect of such stock, subsection (d) of section 1291 shall not apply.
(d) Treatment of certain leased property
For purposes of this part—
(1) In general
Any tangible personal property with respect to which a foreign corporation is the lessee under a lease with a term of at least 12 months shall be treated as an asset actually held by such corporation.
(2) Determination of adjusted basis
(A) In general
The adjusted basis of any asset to which paragraph (1) applies shall be the unamortized portion (as determined under regulations prescribed by the Secretary) of the present value of the payments under the lease for the use of such property.
(B) Present value
For purposes of subparagraph (A), the present value of payments described in subparagraph (A) shall be determined in the manner provided in regulations prescribed by the Secretary—
(i) as of the beginning of the lease term, and
(ii) except as provided in such regulations, by using a discount rate equal to the applicable Federal rate determined under section 1274(d)—
(I) by substituting the lease term for the term of the debt instrument, and
(II) without regard to paragraph (2) or (3) thereof.
(3) Exceptions
This subsection shall not apply in any case where—
(A) the lessor is a related person (as defined in section 954(d)(3)) with respect to the foreign corporation, or
(B) a principal purpose of leasing the property was to avoid the provisions of this part or section 956A.
(e) Special rules for certain intangibles
(1) Research expenditures
The adjusted basis of the total assets of a controlled foreign corporation shall be increased by the research or experimental expenditures (within the meaning of section 174) paid or incurred by such foreign corporation during the taxable year and the preceding 2 taxable years. Any expenditure otherwise taken into account under the preceding sentence shall be reduced by the amount of any reimbursement received by the controlled foreign corporation with respect to such expenditure.
(2) Certain licensed intangibles
(A) In general
In the case of any intangible property (as defined in section 936(h)(3)(B)) with respect to which a controlled foreign corporation is a licensee and which is used by such foreign corporation in the active conduct of a trade or business, the adjusted basis of the total assets of such foreign corporation shall be increased by an amount equal to 300 percent of the payments made during the taxable year by such foreign corporation for the use of such intangible property.
(B) Exceptions
Subparagraph (A) shall not apply to—
(i) any payments to a foreign person if such foreign person is a related person (as defined in section 954(d)(3)) with respect to the controlled foreign corporation, and
(ii) any payments under a license if a principal purpose of entering into such license was to avoid the provisons 1 of this part or section 956A.
(3) Controlled foreign corporation
For purposes of this subsection, the term "controlled foreign corporation" has the meaning given such term by section 957(a).
(f) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part.
(Added
Amendments
1993—Subsec. (b)(9).
Subsecs. (d) to (f).
1989—Subsec. (b)(5).
Subsec. (b)(5)(A).
Subsec. (b)(5)(A)(ii).
1988—Subsec. (a)(4).
Subsec. (a)(5).
Subsec. (b)(1).
Subsec. (b)(3)(A).
Subsec. (b)(5).
Subsec. (b)(6).
Subsec. (b)(8).
Subsecs. (c), (d).
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date
Section applicable to taxable years of foreign corporations beginning after Dec. 31, 1986, see section 1235(h) of
Section Referred to in Other Sections
This section is referred to in