Changes in stock ownership may cause fluctuations in a Tested Foreign Corporation's ownership in a Look-Through Subsidiary during a taxable year. For purposes of the Asset Test, ownership of a Look-Through Subsidiary is determined on each measuring date. If the requisite percent ownership is not met with respect to a corporation on the last day of a measuring period, as defined in Part I. For purposes of the Income Test, a subsidiary is considered a Look-Through Subsidiary if the Tested Foreign Corporation owns an average of 25 percent of the value of the subsidiary for the year, taking into account its ownership on the last day of each measuring period of the Tested Foreign Corporation's taxable year.
If the Tested Foreign Corporation does not maintain, on average, at least percent ownership of the subsidiary for the taxable year, the Tested Foreign Corporation is not, under the general rule in the proposed regulations, treated as receiving its proportionate share of the income of the subsidiary for that year under section c.
However, the Tested Foreign Corporation may be treated as receiving directly its proportionate share of the income of the subsidiary for each measuring period in a taxable year for which the percent ownership requirement is met on the relevant measuring date, provided the taxpayer can establish gross income for each of those measuring periods. Comments are requested concerning appropriate methods for a taxpayer to establish gross income for a measuring period. Section b 7 provides a special characterization rule that applies when a Tested Foreign Corporation owns at least 25 percent of the value of the stock of a domestic corporation and is subject to the accumulated earnings tax under section or waives any benefit under a treaty that would otherwise prevent imposition of such tax.
In such instance, section b 7 treats the qualified stock held by the domestic corporation as a non-passive asset, and the related income as non-passive income. By its terms, the section c look-through rule also could apply to the qualified stock, which is stock in a domestic C corporation that is not a RIC or REIT, and look through to the assets of the corporation that issued the qualified stock for purposes of the Income Test and Asset Test.
US2 wholly owns the stock of a foreign corporation, FC. The section c look-through rule applies to treat the Tested Foreign Corporation as if it held its proportionate share of the assets, and received a proportionate share of the income, of US1. Both the section c look-through rule and the section b 7 characterization rule, by their terms, would apply to the stock of US2.
The section c rule would look through to the assets of US2 and FC. The section b 7 characterization rule would treat the stock of US2 as a non-passive asset, and the income derived from the stock as income as non-passive income. The Treasury Department and the IRS have determined that the special characterization rule of section b 7 should generally take precedence over the section c look-through rule when both rules would apply simultaneously because the characterization rule of section b 7 is the more specific rule where the Tested Foreign Corporation owns a domestic corporation.
Thus, the proposed regulations provide that the look-through rule of section c does not apply to a domestic corporation, and any subsidiaries of the domestic corporation, if the stock of the domestic corporation is characterized, under section b 7 , as a non-passive asset producing non-passive income. However, these proposed regulations provide certain limitations on the application of section b 7 , including a new anti-abuse rule, in which case section c would apply. The limitations and anti-abuse rule are described in Part I. H of this Explanation of Provisions.
However, there are no statutory or regulatory rules that prevent the double counting of income and assets arising from contracts and other transactions among a Tested Foreign Corporation and one or more Look-Through Subsidiaries.
Intercompany items that are not eliminated for purposes of determining a Tested Foreign Corporation's PFIC status may result in a duplication of passive income or passive assets attributed to the Tested Foreign Corporation. Any double-counting of intercompany income and assets distorts the effect of section c on the Income Test and Asset Test. The legislative history to the PFIC rules provides an approach that would eliminate certain assets and income in order to prevent double-counting.
See H. Thus, amounts such as interest and dividends received from foreign or domestic subsidiaries are eliminated from the shareholder's income in applying the income test and the stock or debt investment is eliminated from the shareholder's assets in applying the asset test. Thus, the proposed regulations provide that intercompany payments of dividends and interest between a Look-Through Subsidiary and the Tested Foreign Corporation and stock and debt receivables are eliminated in applying the Income Test and the Asset Test.
In the case of dividends, in order to qualify for elimination, the payment must be attributable to income of a Look-Through Subsidiary that was included in gross income by the Tested Foreign Corporation for purposes of determining its PFIC status. As a result of the elimination rule, for example, interest and dividends received by a Tested Foreign Corporation from a wholly owned Look-Through Subsidiary are eliminated from the Tested Foreign Corporation's gross income for purposes of applying section a 1 , except to the extent that dividend amounts are attributable to income that has not been treated as received directly by the Tested Foreign Corporation under the section c look-through rule.
Additionally, the proposed regulations extend this treatment to intercompany payments between two Look-Through Subsidiaries of a Tested Foreign Corporation and the associated stock and debt receivables.
In the case of a Tested Foreign Corporation that owns less than percent of a Look-Through Subsidiary, the proposed regulations provide that while stock and dividends are eliminated in their entirety, eliminations of debt receivables and interest are made in proportion to the shareholder's direct and indirect ownership by value in the Look-Through Subsidiary. The proposed regulations also provide for eliminations under these principles for ownership interests in a Look-Through Partnership, as well as intercompany debt receivables and interest paid or accrued thereon between a Tested Foreign Corporation and a Look-Through Partnership.
Comments are requested on the application of the elimination rule if the Tested Foreign Corporation owns less than percent of the Look-Through Subsidiary or Partnership. Comments are also requested as to whether the Treasury Department and the IRS should consider the elimination of rents, royalties, or any other types of intercompany income, and any related assets, and if so, how to effectuate the elimination.
Section c provides that a Tested Foreign Corporation is treated as receiving directly its proportionate share of the income of a Look-Through Subsidiary for purposes of applying the Income Test to the Tested Foreign Corporation. Section b 2 C provides that, for purposes of the Income Test, passive income does not include interest, dividends, rents or royalties received or accrued from a related person within the meaning of section d 3 to the extent such amount is properly allocable to income of the related person that is not passive Start Printed Page income.
The Treasury Department and the IRS have determined that, because section c generally applies by classifying an item at the level of Look-Through Subsidiary and then carrying that classification up to the Tested Foreign Corporation, it is appropriate to determine whether the section b 2 C exception applies and, thus, determine the passive or non-passive character of an item of income at the Look-Through Subsidiary level, and then flow up the passive or non-passive character of the item to the Tested Foreign Corporation for purposes of applying the Income Test.
The interaction of section c and certain exceptions from passive income also raises issues that require a threshold determination of whether an exception should apply at a Look-Through Subsidiary level or a Tested Foreign Corporation level. In a bank holding company structure, in which a Tested Foreign Corporation wholly owns a Look-Through Subsidiary that separately satisfies the section b 2 A requirements, the banking exception would apply to the income derived by the Look-Through Subsidiary in its banking business if an approach that applied the exception at the Look-Through Subsidiary level were adopted, but would not apply if an approach that applied the exception at the Tested Foreign Corporation level were adopted because the Tested Foreign Corporation would not literally meet all of the banking exception requirements.
Similarly, the character of assets held by a Look-Through Subsidiary that is a dealer in property in the ordinary course of its trade or business as a dealer would depend on whether an approach that applied the exception in section c 2 C at the Look-Through Subsidiary level were adopted, or whether an approach were applied that determined the character at the level of a Tested Foreign Corporation that was not itself a dealer.
A corollary issue arises with respect to the application of other exceptions to passive income under section c.
In a structure in which a Tested Foreign Corporation holds real estate assets directly and employees of its Look-Through Subsidiary conduct the activities related to the Tested Foreign Corporation's real estate business necessary to satisfy the exception, the exception would apply if the character of the income were determined at the level of the Tested Foreign Corporation and the activities of the managers and employees of the Look-Through Subsidiary were attributed to the Tested Foreign Corporation. However, the exception would not apply if the activities were not attributed to the Tested Foreign Corporation, because in such case the relevant activities are not performed by employees of the Tested Foreign Corporation, as literally required in the regulation.
Additional complexities arise when the Tested Foreign Corporation owns less than percent of the Look-Through Subsidiary. Under current law, the character of income or assets is determined at the level of the entity that directly earns the income or holds the assets based on the activities of that entity.
However, the Treasury Department and the IRS understand that active businesses in foreign jurisdictions generating rent and royalty income are often organized with assets and income, on the one hand, and activities, on the other hand, contained in separate entities for various business reasons. The Treasury Department and the IRS have determined that if assets are held and activities undertaken in separate entities within a group of wholly-owned Look-Through Subsidiaries headed by a Tested Foreign Corporation, the activities of the Look-Through Subsidiaries should be taken into account for purposes of determining whether an item of rent or royalty income of the Tested Foreign Corporation is passive income, as they would if the Look-Through Subsidiaries were disregarded as separate from the Tested Foreign Corporation for U.
Federal income tax purposes. Accordingly, the proposed regulations provide that an item of rent or royalty income received or accrued by a Tested Foreign Corporation or treated as received or accrued by the Tested Foreign Corporation pursuant to section c that would otherwise be passive income under the general rule is not passive income for purposes of section if the item would be excluded from passive income, determined by taking into account the activities performed by the officers and employees of the Tested Foreign Corporation as well as activities performed by the officers and employees of certain Look-Through Subsidiaries and certain partnerships in which the Tested Foreign Corporation or one of the Look-Through Subsidiaries is a partner.
In some cases, a Look-Through Subsidiary or Look-Through Partnership may have more than one unrelated owner owning at least 25 percent of the entity's value. Activities, unlike income or expense, are qualitative in nature and cannot be easily allocated between owners based on their percentage ownership.
If activities are attributed to any owner of 25 percent or more of the Look-Through Subsidiary or partnership, then up to four owners could potentially be able to take into account the same activities. Because it may be difficult to allocate activities among multiple entities but inappropriate to allow double-counting of the activities by attributing the activities of a Look-Through Subsidiary or a partnership to multiple unrelated entities, the proposed regulations provide that a Tested Foreign Corporation may take into account the activities performed only by those Look-Through Subsidiaries or partnerships with respect to which the Tested Foreign Corporation owns directly or indirectly more than 50 percent of the value, because at this level of ownership the activities of the Look-Through Subsidiary or Look-Through Partnership could be attributed to only another Start Printed Page foreign corporation within the same chain of ownership as the Tested Foreign Corporation and not an unrelated entity.
The Treasury Department and the IRS request comments on the application of the activity attribution rules to Look-Through Subsidiaries that are not wholly owned by a Tested Foreign Corporation, including whether it is appropriate for a Tested Foreign Corporation to take into account all activities of a Look-Through Subsidiary in which the Tested Foreign Corporation owns more than 50 percent of the value of the stock, and whether a different ownership threshold for attribution of activities would be appropriate. The Treasury Department and the IRS also request comments on whether the ability to apply an exception to passive income at the Tested Foreign Corporation level taking into account the activities of certain subsidiaries should apply for purposes of other exceptions, such as for purposes of the exception in section b 2 A.
Comments should consider the interaction of the rules for elimination of intercompany assets and income described in Part I. Section c does not address the treatment of a Tested Foreign Corporation's gain from the disposition of stock of a Look-Through Subsidiary for purposes of the Income Test.
Questions have been raised as to whether such a disposition should be treated as a disposition of stock or a deemed disposition of the assets of the Look-Through Subsidiary, and how gain on the disposition should be characterized for purposes of the Income Test. The proposed regulations provide that, for purposes of the Income Test, the disposition of a Look-Through Subsidiary is treated as the disposition of stock, and gain is computed accordingly. However, the proposed regulations limit the amount of the gain taken into account for purposes of the Income Test in order to avoid double-counting any income that the Tested Foreign Corporation takes into account under section c in determining the PFIC status of the Tested Foreign Corporation during the year of the disposition or took into account for such purpose in a prior year that has not been distributed as a dividend to the Tested Foreign Corporation.
The Residual Gain is computed on a share-by-share basis with respect to income of a Look-Through Subsidiary that was taken into account by the Tested Foreign Corporation and dividends received from a Look-Through Subsidiary. Comments are requested on the calculation of Residual Gain for purposes of section a. However, section c does not contain a look-through rule comparable to section c. In order to comport with the policy underlying section c , the Treasury Department and the IRS have determined that the character of the gain from the disposition of a Look-Through Subsidiary should correspond to the character of the underlying assets of the Look-Through Subsidiary.
Comments are requested concerning whether any additional guidance is needed concerning the disposition of interests in a Look-Through Partnership. Under section b 3 , the Change-of-Business Exception applies for a taxable year of the Tested Foreign Corporation if i neither the Tested Foreign Corporation nor a predecessor of the Tested Foreign Corporation was a PFIC in a prior taxable year; ii it is established to the satisfaction of the Secretary that A substantially all of the passive income of the Tested Foreign Corporation for the taxable year is attributable to proceeds from the disposition of one or more active trades or businesses, and B the Tested Foreign Corporation will not be a PFIC for either of the two taxable years following such taxable year; and iii the Tested Foreign Corporation is not, in fact, a PFIC for either of such two taxable years.
Thus, notwithstanding the legislative history and the title of section b 3 , a Tested Foreign Corporation may qualify for the Change-of-Business Exception even if it does not engage in an active business after a disposition. The proposed regulations provide general guidance with respect to the Change-of-Business Exception. First, the proposed regulations provide that for purposes of section b 3 B , the existence of an active trade or business and the determination of whether assets are used in an active trade or business is determined by reference to Treas.
If, however, the activity attribution rules described in Part I. In addition, the proposed regulations provide that income attributable to proceeds from the disposition of an active trade or business means income Start Printed Page earned on investment of such proceeds but does not include the proceeds themselves. The regulations also provide that section b 3 may apply to either a taxable year of the disposition of the active trade or business or the immediately succeeding taxable year, but in any event may apply to only one year with respect to a disposition.
Thus, a Tested Foreign Corporation that receives proceeds from a disposition in more than one taxable year may apply the Change-of-Business Exception to only one year. A Tested Foreign Corporation can choose which year it applies the Change-of-Business Exception if the exception can apply in more than one year.
Several comments have inquired regarding the application of the Change-of-Business Exception to the sale or exchange of stock of a Look-Through Subsidiary that conducts an active trade or business. Specifically, these comments have questioned whether, by reason of section c , the Tested Foreign Corporation should be treated as disposing of an active trade or business conducted by a Look-Through Subsidiary for purposes of the Change-of-Business Exception. Thus, the proposed regulations provide that, for purposes of the Change-of-Business Exception, a disposition of stock of a Look-Through Subsidiary is treated as a disposition of a proportionate share of the assets held by the Look-Through Subsidiary on the date of the disposition.
Therefore, the portion of the proceeds attributable to assets used by a Look-Through Subsidiary in an active trade or business is considered for purposes of the Change-of-Business Exception to be proceeds from the disposition of an active trade or business. The Treasury Department and the IRS also understand that Tested Foreign Corporations may not be able to satisfy the requirements of the Change-of-Business Exception provided in section b 3 in certain situations in which proceeds from the disposition of an active trade or business cause the Tested Foreign Corporation to qualify as a PFIC pursuant to the Asset Test.
The Treasury Department and the IRS have determined that if a Tested Foreign Corporation has historically engaged in an active trade or business and proceeds from the disposition of such business cause it to qualify as a PFIC, it may be appropriate in certain circumstances to which section b 3 does not apply to treat the Tested Foreign Corporation as not a PFIC. Accordingly, the proposed regulations expand the Change-of-Business Exception in section b 3 to apply if, on the measuring dates that occur during the taxable year to which the Change-of-Business Exception is proposed to apply and after the disposition, on average, substantially all of the passive assets of a corporation are attributable to proceeds from the disposition of one or more active trades or businesses.
Furthermore, the Treasury Department and the IRS understand that in certain circumstances, the Change-of-Business Exception could apply to the liquidation of a Tested Foreign Corporation if it were not for the fact that foreign law restrictions make it difficult to complete the liquidation within the year for which the exception applies. The Treasury Department and the IRS have determined that it is appropriate to allow the Change-of-Business Exception to be relied upon when such a liquidation is completed within a reasonable period of time after the disposition.
Federal income tax principles apply to determine whether a Tested Foreign Corporation has completely liquidated. See Rev. The Treasury Department and the IRS request comments concerning whether any other guidance is necessary concerning the application of section b 3 , including concerning the conditions under which the requirements of section b 3 C will be considered satisfied. The proposed regulations clarify that stock of the percent-owned domestic corporation and the qualified stock generally must be owned by the Tested Foreign Corporation and the percent-owned domestic corporation, respectively, either directly or indirectly through one or more partnerships.
The Treasury Department and the IRS have determined that the accumulated earnings tax need not actually be imposed on a foreign corporation in a taxable year in order for it to qualify for section b 7. Furthermore, a Tested Foreign Corporation's ability to rely on section b 7 in a given year should not depend on whether it has U. Additionally, comments have raised questions concerning the waiver of treaty benefits that would prevent imposition of the accumulated earnings tax. The proposed regulations provide that a Tested Foreign Corporation must waive any benefit under a treaty by attaching to its U.
Federal income tax return for the taxable year for which it applies section b 7 a statement that it irrevocably waives treaty protection against the imposition of the accumulated earnings tax, effective for all prior, current, and future taxable years. If a Tested Foreign Corporation is not otherwise required to file a U. Federal income tax return, the waiver can be made in a resolution or other governance document to be kept in the entity's records or, in the case of a publicly traded corporation, in a statement in the corporation's public Start Printed Page filings.
The Treasury Department and the IRS understand that foreign corporations may be relying on section b 7 to avoid being treated as PFICs notwithstanding their direct and indirect ownership of predominantly passive assets by ensuring that a sufficient amount of such assets are held indirectly through two tiers of domestic subsidiaries. Thus, if a Tested Foreign Corporation would qualify as a PFIC if section b 7 did not apply, either because section c applied to treat the Tested Foreign Corporation as owning directly the assets of a domestic corporation in which it indirectly held qualified stock, or because the qualified stock was treated as a passive asset, then persons that held stock of a PFIC through the Tested Foreign Corporation would be considered under section a 2 B and Treas.
To address the possibility of passive assets—particularly non-stock assets that could not themselves be eligible for the special treatment of section b 7 —being held through a two-tiered chain of domestic subsidiaries in order to avoid the PFIC rules, the proposed regulations further provide anti-abuse rules under the authority of section g , one of which provides that section b 7 will not apply if the Tested Foreign Corporation would be a PFIC if the qualified stock or any income received or accrued with respect thereto were disregarded. Furthermore, under a second anti-abuse rule, section b 7 will not apply if a principal purpose for the Tested Foreign Corporation's formation or acquisition of the percent-owned domestic corporation is to avoid classification of the Tested Foreign Corporation as a PFIC.
A principal purpose will be deemed to exist if the percent-owned domestic corporation is not engaged in an active trade or business in the United States. No inference is intended as to the application of section b 7 under prior law. The IRS may, where appropriate, challenge transactions under the Code, regulatory provisions under prior law, or judicial doctrines.
The proposed regulations provide guidance regarding whether the income of a foreign corporation is excluded from passive income pursuant to section b 2 B because the income is derived in the active conduct of an insurance business by a QIC. Part II. Generally, section f provides that a QIC is a foreign corporation that 1 would be subject to tax under subchapter L if it were a domestic corporation and 2 has applicable insurance liabilities that constitute more than 25 percent of its total assets. See section f 1 A. It provides that a foreign corporation would be subject to tax under subchapter L if it were a domestic corporation if it is an insurance company as defined in section a generally requiring more than half of the corporation's business during the taxable year to be the issuing of insurance or annuity contracts, or the reinsuring of risks underwritten by insurance companies.
This determination is made on the basis of the foreign corporation's liabilities and assets as reported on the corporation's applicable financial statement for the last year ending with or within the taxable year. If a foreign corporation fails the 25 percent test, section f 2 permits a United States person to elect to treat stock in the corporation as stock of a QIC under certain circumstances.
Start Printed Page In the case of a foreign corporation that fails the percent test, Congress included the predominantly engaged requirement as part of the alternative facts and circumstances test to ascertain whether a foreign corporation is truly engaged in an insurance business despite the low ratio of applicable insurance liabilities to assets.
Additional relevant facts for determining whether the foreign corporation is predominantly engaged in an insurance business include: Claims payment patterns for the current year and prior years; the foreign corporation's loss exposure as calculated for a regulator or for a rating agency, or if those are not calculated, for internal pricing purposes; the percentage of gross receipts constituting premiums for the current and prior years; and the number and size of insurance contracts issued or taken on through reinsurance by the foreign corporation.
The fact that a foreign corporation has been holding itself out as an insurer for a long period is not determinative either way. The proposed regulations clarify that each of these factors is intended to be tested based on whether the particular facts and circumstances of the foreign corporation are comparable to commercial insurance arrangements providing similar lines of coverage to unrelated parties in arm's length transactions.
As noted in Part II. See sections a and c. The Treasury Department and the IRS request comments regarding whether this proposed test appropriately determines whether a foreign corporation is predominantly engaged in an insurance business and invite comments on whether the proposed test would have material effects upon the way in which entities engaged in the provision of insurance are structured.
Additionally, the corporation may not issue or enter into any new insurance, annuity, or reinsurance contracts during the taxable year other than contractually obligated renewals of existing insurance contracts or reinsurance contracts pursuant to and consistent with the corporation's plan of liquidation or termination of operations and must make payments during the annual reporting period covered by the applicable financial statement to satisfy the claims under insurance, annuity, or reinsurance contracts issued or entered into before the corporation ceased entering into new business.
The Treasury Department and the IRS understand that it is possible that the minimum credit rating required to be classified as secure to write new insurance business may be higher for some lines of insurance business than for other lines of insurance business. For this purpose, the proposed rule is intended to apply to the highest minimum credit rating required to be classified as secure to write new insurance business for any line of insurance business. The Treasury Department and the IRS understand that there may be certain lines of insurance business, such as financial guaranty insurance, where market realities require a credit rating in excess of the minimum credit rating for a foreign corporation to be classified as secure to write new insurance business in the relevant business line for the current year.
The Treasury Department and the IRS request comments regarding this fact pattern and how best to address these lines of business in the context of the rating-related circumstances test. A United States person, however, may not rely upon any statement by the foreign corporation to make the election under section f 2 if the shareholder knows or has reason to know that the statement made by the foreign corporation was incorrect.
Because the foreign corporation possesses the information necessary to make an election under the alternative facts and circumstances test, the Treasury Department and the IRS have determined that it is appropriate to require a United States person to obtain that information from the foreign corporation in order to make the election. To make the election before final regulations are published, a United States person that owns stock of a foreign corporation electing to treat that stock as stock of a QIC under the alternative facts and circumstances test must file a limited-information Form or successor form.
For this purpose, a United States person must file a Form with the box checked regarding the QIC election and must provide the identifying information of the shareholder and the foreign corporation. The United States person is not required to complete any other part of Form if that person is only filing the Form to make the QIC election under the alternative facts and circumstances test. The Treasury Department and the IRS request comments on ways to reduce burden on small shareholders with respect to the alternative facts and circumstances test.
Specifically, the proposed regulations provide that the amount of applicable insurance liabilities may not exceed the lesser of 1 the amount shown on the most recent applicable financial statement; 2 the minimum amount required by applicable law or regulation of the jurisdiction of the applicable insurance regulatory body; and 3 the amount shown on the most recent financial statement made on the basis of U. The Treasury Department and the IRS have determined that the additional limitations are necessary to clarify which financial statements are used to apply the 25 percent test and the 10 percent test, and that it is appropriate to limit the amount of applicable insurance liabilities to the minimum amount of liabilities required to be reported by an insurance regulator, even if the foreign corporation's regulator would accept a higher liability amount for regulatory purposes.
In addition, under section f 4 , an applicable financial statement only includes financial statements made on the basis of US GAAP or IFRS if such a statement has been prepared for financial reporting purposes. If a foreign corporation prepares a financial statement on the basis of US GAAP or IFRS for a purpose other than financial reporting, the Treasury Department and the IRS have determined that the amount of applicable insurance liabilities under this financial statement, if lower than the amount on the applicable financial statement, is an appropriate limit on the amount of applicable insurance liabilities.
This limitation is appropriate because Congress has expressed a preference for widely used standards of financial accounting through its references to such standards in section f 4 A. To the extent that such an applicable financial statement does not discount losses on an economically reasonable basis, the foreign corporation must reduce its applicable insurance liabilities to reflect discounting that would apply under either US GAAP or IFRS.
Notice states that an asset that produces both passive income and non-passive income during a Tested Foreign Corporation's taxable year is treated partly as a passive asset and partly as a non-passive asset in proportion to the relative amounts of income generated by the asset during the year. All these factors could give rise to larger and more abrupt adjustments in private sector behavior, and a more abrupt economic slowdown, than envisaged in the baseline. Financial sponsor Management buyout Divisional buyout Buy—sell agreement Leveraged recapitalization Dividend recapitalization. London: Times Online. Creative Commons. Retrieved
The Treasury Department and the IRS have determined that a method of determining insurance liabilities that fails to provide for a reasonable discounting rate does not take into account a factor that is necessary to appropriately and accurately report the amount of applicable insurance liabilities. For this purpose, the question of whether losses are discounted on an economically reasonable basis is determined under the relevant facts and circumstances. However, in order for losses to be discounted on an economically reasonable basis, discounting must be based on loss and claim payment patterns for either the foreign corporation or insurance companies in similar lines of insurance business.
In addition, a discount rate based on these loss and claim payment patterns of at least the risk free rate in U.
http://preview.bluetangent.org/suro-el-esencial.php If the foreign corporation fails to do so, the foreign corporation will be treated as having no applicable insurance liabilities for purposes of the QIC test. Absent this proposed rule, the Treasury Department and the IRS are concerned that a foreign corporation may change its method for preparing its financial statement to benefit from certain elements of a local regulatory accounting regime, such as a more expansive definition of insurance liability or a method of calculating a larger amount of insurance liabilities, solely for purposes of qualifying as a QIC.
Comments are requested on this proposed rule. Under the proposed regulations, an insurance business also includes the investment activities and administrative services required to support or that are substantially related to those insurance, annuity, or reinsurance contracts issued or entered into by the QIC. To give effect to the active conduct requirement, the proposed regulations differentiated between activities performed by a corporation through its officers and employees and activities performed by other persons for example, employees of other Start Printed Page entities or independent contractors for the corporation.
Hence, under the proposed regulations, only insurance investment business activities performed by a corporation's officers and employees would be included in the corporation's active conduct of its insurance business. Accordingly, under the proposed regulations, investment income would have qualified for the PFIC insurance exception only if the corporation's own officers and employees performed the insurance business activities that produce the income.
Generally, to satisfy the control test, i the QIC must either own, directly or indirectly more than 50 percent of the vote and value for a corporation or capital and profits interest for a partnership of the entity whose officers or employees are performing services for the QIC or ii a common parent must own, directly or indirectly, more than 80 percent of the vote and value or capital and profits interest of both the QIC and the entity performing services for the QIC. In addition, the QIC must exercise regular oversight and supervision over the services performed by the other entity's officers and employees for the QIC.
For example, it is common to charge for investment advisory or management services via a fee calculated as a percentage of the underlying assets under management AUM , and a fee calculated on this basis may be arm's length under section principles. To make this determination, the QIC must determine its active conduct percentage. If the QIC's active conduct percentage is less than 50 percent, then none of its income is excluded from passive income pursuant to the exception in section b 2 B for the active conduct of an insurance business. In response to comments made to the proposed regulations, the active conduct percentage is based on the QIC's expenses to provide a bright-line test for measuring the QIC's active conduct.
The Treasury Department and the IRS determined that the amount of expenses for insurance activities performed by the QIC or by a related party as compared to the total expenses of the QIC indicates the extent to which the QIC conducts the business itself and therefore, actively engages in an insurance business. Whether the relative amount of expenses for insurance activities performed by the QIC accurately assesses whether a QIC is engaged in the active conduct of an insurance business.
The contours of the control test, which allow for a QIC to benefit from a higher active conduct percentage based on activities paid for by the QIC of an entity in which a common parent, but not the QIC itself, owns more than 80 percent of the interests. The Treasury Department and IRS propose this standard based on an understanding of common ownership structures in the insurance industry, and note that the attribution of activities described in Part I.
The active conduct percentage calculation in general, including whether this test should be the only test for determining whether income is derived in the active conduct of an insurance business or whether such a percentage would better serve as an objective safe harbor alongside a facts and circumstances test. Under this provision, a Tested Foreign Corporation is treated as if it directly holds its proportionate share of the assets and as if it directly receives its proportionate share of the income of the Look-Through Subsidiary or Look-Through Partnership.
Generally, if the income or assets are passive in the hands of the Look-Through Subsidiary or Look-Through Partnership, the income or assets are treated as passive income and passive assets of the Tested Foreign Corporation. A trade deficit refers to just the balance of trade on visible goods. This trade deficit is a component of the current account. The UK has often run a deficit on the trade account, but run a surplus on services. Skip to content. The main components of the current account are: Trade in goods visible balance Trade in services invisible balance , e.
International aid A deficit on the current account means that the value of imports is greater than the value of exports. A surplus on the current account means that the value of imports is less than the value of exports. Balance of payments and current account The balance of payments is composed of two main aspects. Example — China and US To give a simplistic example. If the US runs a current account deficit — it will also have a surplus on the financial account The US buys manufactured clothes and toys from China.
US current account deficit China uses this foreign currency to buy US bonds. Effects of a current account deficit Current account deficit Imports greater than exports, so expenditure is leaving the economy to buy imports. Current account deficit may cause depreciation as there is greater demand for imports and foreign currency.
A current account deficit is financed by attracting capital inflows, e. This means foreigners hold a greater claim on assets and dividends. Could also make country vulnerable to capital flight A current account deficit may be a sign the economy is uncompetitive. Consumers prefer to buy cheaper imports than domestic goods. The benefit of a current account deficit is that it allows higher levels of domestic consumption than otherwise possible because we are buying from abroad.
Primary sanctions to be reimposed following a day wind down period ending on November 4, will result from revocation of General License H. As a result of these actions, U. Secondary sanctions to be reimposed after a day wind down period ending on November 4, are the following sanctions and associated services:. In addition, as appropriate, secondary sanctions for activities involving persons and vessels previously removed from the SDN List and other U. This will include transfer of persons meeting the definitions of "Government of Iran" or "Iranian financial institution" from the List to the SDN List, no later than November 5, The guidance makes clear that "the State Department intends to consider relevant evidence in assessing each country's efforts to reduce the volume of crude oil imported from Iran during the day wind down period, including the quantity and percentage of the reduction in purchase of Iranian crude oil, the termination of contracts for future delivery of Iranian crude oil, and other actions that demonstrate a commitment to decrease substantially such purchases.
Although the guidance stops short of prohibiting new activity under the existing general licenses or waivers, the guidance does state that when considering a potential enforcement action in connection with activities engaged in following the applicable wind down period, OFAC intends to "evaluate efforts and steps taken to wind down activities and will assess whether any new business was entered into involving Iran during the applicable wind-down period.
OFAC also signaled its intent to continue to aggressively target persons who engage in any sanctionable activity, regardless of whether the activity was the subject of Implementation Day relief — including activities related to Iran's support for terrorism, its ballistic missile program, human rights abuses, and destabilizing activity in the Middle East. To this end, the OFAC guidance included a recommendation that any person conducting wind down activities conduct due diligence "sufficient to ensure that it is not knowingly engaging in transactions with persons on the SDN List or in activities that would be sanctionable under authorities targeting Iran's malign activities.
Also, if you receive the 6 month extension to October 15, , the FBAR filing deadline will be extended to that date too. Not sure whether you must file an FBAR for? We're here to help break down your top questions of FBAR filing. Whether you live in the U. For example, suppose you are a U. Foreign financial accounts include bank accounts, securities accounts, and certain foreign retirement arrangements.
Accounts located outside of the 50 states, D. Certain jointly owned accounts, correspondent or nostro accounts, and accounts held by governmental entities generally are not subject to the FBAR filing requirement.
Form is part of your tax return, unlike the FBAR which is filed separately. In most cases, these taxpayers need to complete and attach Schedule B Form to their tax returns. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and also requires U. In addition, some of you may also have to complete and attach Form to your return.