26 U.S.C. § 954 : US Code - Section 954: Foreign base company income

Search 26 U.S.C. § 954 : US Code - Section 954: Foreign base company income

(a) Foreign base company income
For purposes of section 952(a)(2), the term "foreign base company
income" means for any taxable year the sum of -
(1) the foreign personal holding company income for the taxable
year (determined under subsection (c) and reduced as provided in
subsection (b)(5)),
(2) the foreign base company sales income for the taxable year
(determined under subsection (d) and reduced as provided in
subsection (b)(5)),
(3) the foreign base company services income for the taxable
year (determined under subsection (e) and reduced as provided in
subsection (b)(5)),
[(4) Repealed. Pub. L. 108-357, title IV, Sec. 415(a)(1), Oct.
22, 2004, 118 Stat. 1511]
(5) the foreign base company oil related income for the taxable
year (determined under subsection (g) and reduced as provided in
subsection (b)(5)).
(b) Exclusion and special rules
[(1) Repealed. Pub. L. 94-12, title VI, Sec. 602(c)(1), Mar. 29,
1975, 89 Stat. 58]
[(2) Repealed. Pub. L. 99-514, title XII, Sec. 1221(c)(1), Oct.
22, 1986, 100 Stat. 2553]
(3) De minimis, etc., rules
For purposes of subsection (a) and section 953 -
(A) De minimis rule
If the sum of foreign base company income (determined without
regard to paragraph (5)) and the gross insurance income for the
taxable year is less than the lesser of -
(i) 5 percent of gross income, or
(ii) $1,000,000,
no part of the gross income for the taxable year shall be
treated as foreign base company income or insurance income.
(B) Foreign base company income and insurance income in excess
of 70 percent of gross income
If the sum of the foreign base company income (determined
without regard to paragraph (5)) and the gross insurance income
for the taxable year exceeds 70 percent of gross income, the
entire gross income for the taxable year shall, subject to the
provisions of paragraphs (4) and (5), be treated as foreign
base company income or insurance income (whichever is
appropriate).
(C) Gross insurance income
For purposes of subparagraphs (A) and (B), the term "gross
insurance income" means any item of gross income taken into
account in determining insurance income under section 953.
(4) Exception for certain income subject to high foreign taxes
For purposes of subsection (a) and section 953, foreign base
company income and insurance income shall not include any item of
income received by a controlled foreign corporation if the
taxpayer establishes to the satisfaction of the Secretary that
such income was subject to an effective rate of income tax
imposed by a foreign country greater than 90 percent of the
maximum rate of tax specified in section 11. The preceding
sentence shall not apply to foreign base company oil-related
income described in subsection (a)(5).
(5) Deductions to be taken into account
For purposes of subsection (a), the foreign personal holding
company income, the foreign base company sales income, the
foreign base company services income,,(!1) and the foreign base
company oil related income shall be reduced, under regulations
prescribed by the Secretary so as to take into account deductions
(including taxes) properly allocable to such income. Except to
the extent provided in regulations prescribed by the Secretary,
any interest which is paid or accrued by the controlled foreign
corporation to any United States shareholder in such corporation
(or any controlled foreign corporation related to such a
shareholder) shall be allocated first to foreign personal holding
company income which is passive income (within the meaning of
section 904(d)(2)) of such corporation to the extent thereof. The
Secretary may, by regulations, provide that the preceding
sentence shall apply also to interest paid or accrued to other
persons.
(6) Foreign base company oil related income not treated as
another kind of base company income
Income of a corporation which is foreign base company oil
related income shall not be considered foreign base company
income of such corporation under paragraph (2),(!2) or (3) of
subsection (a).
(c) Foreign personal holding company income
(1) In general
For purposes of subsection (a)(1), the term "foreign personal
holding company income" means the portion of the gross income
which consists of:
(A) Dividends, etc.
Dividends, interest, royalties, rents, and annuities.
(B) Certain property transactions
The excess of gains over losses from the sale or exchange of
property -
(i) which gives rise to income described in subparagraph
(A) (after application of paragraph (2)(A)) other than
property which gives rise to income not treated as foreign
personal holding company income by reason of subsection (h)
or (i) for the taxable year,
(ii) which is an interest in a trust, partnership, or
REMIC, or
(iii) which does not give rise to any income.
Gains and losses from the sale or exchange of any property
which, in the hands of the controlled foreign corporation, is
property described in section 1221(a)(1) shall not be taken
into account under this subparagraph.
(C) Commodities transactions
The excess of gains over losses from transactions (including
futures, forward, and similar transactions) in any commodities.
This subparagraph shall not apply to gains or losses which -
(i) arise out of commodity hedging transactions (as defined
in paragraph (5)(A)),
(ii) are active business gains or losses from the sale of
commodities, but only if substantially all of the controlled
foreign corporation's commodities are property described in
paragraph (1), (2), or (8) of section 1221(a), or
(iii) are foreign currency gains or losses (as defined in
section 988(b)) attributable to any section 988 transactions.
(D) Foreign currency gains
The excess of foreign currency gains over foreign currency
losses (as defined in section 988(b)) attributable to any
section 988 transactions. This subparagraph shall not apply in
the case of any transaction directly related to the business
needs of the controlled foreign corporation.
(E) Income equivalent to interest
Any income equivalent to interest, including income from
commitment fees (or similar amounts) for loans actually made.
(F) Income from notional principal contracts
Any item of income, gain, deduction, or loss from a notional
principal contract entered into for purposes of hedging any
item described in any preceding subparagraph shall not be taken
into account for purposes of this subparagraph but shall be
taken into account under such other subparagraph.
(G) Payments in lieu of dividends
Payments in lieu of dividends which are made pursuant to an
agreement to which section 1058 applies.
(I) (!3) Personal service contracts
(i) Amounts received under a contract under which the
corporation is to furnish personal services if -
(I) some person other than the corporation has the right to
designate (by name or by description) the individual who is
to perform the services, or
(II) the individual who is to perform the services is
designated (by name or by description) in the contract, and
(ii) amounts received from the sale or other disposition of
such a contract.
This subparagraph shall apply with respect to amounts received
for services under a particular contract only if at some time
during the taxable year 25 percent or more in value of the
outstanding stock of the corporation is owned, directly or
indirectly, by or for the individual who has performed, is to
perform, or may be designated (by name or by description) as
the one to perform, such services.
(2) Exception for certain amounts
(A) Rents and royalties derived in active business
Foreign personal holding company income shall not include
rents and royalties which are derived in the active conduct of
a trade or business and which are received from a person other
than a related person (within the meaning of subsection
(d)(3)). For purposes of the preceding sentence, rents derived
from leasing an aircraft or vessel in foreign commerce shall
not fail to be treated as derived in the active conduct of a
trade or business if, as determined under regulations
prescribed by the Secretary, the active leasing expenses are
not less than 10 percent of the profit on the lease.
(B) Certain export financing
Foreign personal holding company income shall not include any
interest which is derived in the conduct of a banking business
and which is export financing interest (as defined in section
904(d)(2)(G)).
(C) Exception for dealers
Except as provided by regulations, in the case of a regular
dealer in property which is property described in paragraph
(1)(B), forward contracts, option contracts, or similar
financial instruments (including notional principal contracts
and all instruments referenced to commodities), there shall not
be taken into account in computing foreign personal holding
company income -
(i) any item of income, gain, deduction, or loss (other
than any item described in subparagraph (A), (E), or (G) of
paragraph (1)) from any transaction (including hedging
transactions and transactions involving physical settlement)
entered into in the ordinary course of such dealer's trade or
business as such a dealer, and
(ii) if such dealer is a dealer in securities (within the
meaning of section 475), any interest or dividend or
equivalent amount described in subparagraph (E) or (G) of
paragraph (1) from any transaction (including any hedging
transaction or transaction described in section 956(c)(2)(J))
entered into in the ordinary course of such dealer's trade or
business as such a dealer in securities, but only if the
income from the transaction is attributable to activities of
the dealer in the country under the laws of which the dealer
is created or organized (or in the case of a qualified
business unit described in section 989(a), is attributable to
activities of the unit in the country in which the unit both
maintains its principal office and conducts substantial
business activity).
(3) Certain income received from related persons
(A) In general
Except as provided in subparagraph (B), the term "foreign
personal holding company income" does not include -
(i) dividends and interest received from a related person
which (I) is a corporation created or organized under the
laws of the same foreign country under the laws of which the
controlled foreign corporation is created or organized, and
(II) has a substantial part of its assets used in its trade
or business located in such same foreign country, and
(ii) rents and royalties received from a corporation which
is a related person for the use of, or the privilege of
using, property within the country under the laws of which
the controlled foreign corporation is created or organized.
To the extent provided in regulations, payments made by a
partnership with 1 or more corporate partners shall be treated
as made by such corporate partners in proportion to their
respective interests in the partnership.
(B) Exception not to apply to items which reduce subpart F
income
Subparagraph (A) shall not apply in the case of any interest,
rent, or royalty to the extent such interest, rent, or royalty
reduces the payor's subpart F income or creates (or increases)
a deficit which under section 952(c) may reduce the subpart F
income of the payor or another controlled foreign corporation.
(C) Exception for certain dividends
Subparagraph (A)(i) shall not apply to any dividend with
respect to any stock which is attributable to earnings and
profits of the distributing corporation accumulated during any
period during which the person receiving such dividend did not
hold such stock either directly, or indirectly through a chain
of one or more subsidiaries each of which meets the
requirements of subparagraph (A)(i).
(4) Look-thru rule for certain partnership sales
(A) In general
In the case of any sale by a controlled foreign corporation
of an interest in a partnership with respect to which such
corporation is a 25-percent owner, such corporation shall be
treated for purposes of this subsection as selling the
proportionate share of the assets of the partnership
attributable to such interest. The Secretary shall prescribe
such regulations as may be appropriate to prevent abuse of the
purposes of this paragraph, including regulations providing for
coordination of this paragraph with the provisions of
subchapter K.
(B) 25-percent owner
For purposes of this paragraph, the term "25-percent owner"
means a controlled foreign corporation which owns directly 25
percent or more of the capital or profits interest in a
partnership. For purposes of the preceding sentence, if a
controlled foreign corporation is a shareholder or partner of a
corporation or partnership, the controlled foreign corporation
shall be treated as owning directly its proportionate share of
any such capital or profits interest held directly or
indirectly by such corporation or partnership. If a controlled
foreign corporation is treated as owning a capital or profits
interest in a partnership under constructive ownership rules
similar to the rules of section 958(b), the controlled foreign
corporation shall be treated as owning such interest directly
for purposes of this subparagraph.
(5) Definition and special rules relating to commodity
transactions
(A) Commodity hedging transactions
For purposes of paragraph (1)(C)(i), the term "commodity
hedging transaction" means any transaction with respect to a
commodity if such transaction -
(i) is a hedging transaction as defined in section
1221(b)(2), determined -
(I) without regard to subparagraph (A)(ii) thereof,
(II) by applying subparagraph (A)(i) thereof by
substituting "ordinary property or property described in
section 1231(b)" for "ordinary property", and
(III) by substituting "controlled foreign corporation"
for "taxpayer" each place it appears, and
(ii) is clearly identified as such in accordance with
section 1221(a)(7).
(B) Treatment of dealer activities under paragraph (1)(C)
Commodities with respect to which gains and losses are not
taken into account under paragraph (2)(C) in computing a
controlled foreign corporation's foreign personal holding
company income shall not be taken into account in applying the
substantially all test under paragraph (1)(C)(ii) to such
corporation.
(C) Regulations
The Secretary shall prescribe such regulations as are
appropriate to carry out the purposes of paragraph (1)(C) in
the case of transactions involving related parties.
(d) Foreign base company sales income
(1) In general
For purposes of subsection (a)(2), the term "foreign base
company sales income" means income (whether in the form of
profits, commissions, fees, or otherwise) derived in connection
with the purchase of personal property from a related person and
its sale to any person, the sale of personal property to any
person on behalf of a related person, the purchase of personal
property from any person and its sale to a related person, or the
purchase of personal property from any person on behalf of a
related person where -
(A) the property which is purchased (or in the case of
property sold on behalf of a related person, the property which
is sold) is manufactured, produced, grown, or extracted outside
the country under the laws of which the controlled foreign
corporation is created or organized, and
(B) the property is sold for use, consumption, or disposition
outside such foreign country, or, in the case of property
purchased on behalf of a related person, is purchased for use,
consumption, or disposition outside such foreign country.
For purposes of this subsection, personal property does not
include agricultural commodities which are not grown in the
United States in commercially marketable quantities.
(2) Certain branch income
For purposes of determining foreign base company sales income
in situations in which the carrying on of activities by a
controlled foreign corporation through a branch or similar
establishment outside the country of incorporation of the
controlled foreign corporation has substantially the same effect
as if such branch or similar establishment were a wholly owned
subsidiary corporation deriving such income, under regulations
prescribed by the Secretary the income attributable to the
carrying on of such activities of such branch or similar
establishment shall be treated as income derived by a wholly
owned subsidiary of the controlled foreign corporation and shall
constitute foreign base company sales income of the controlled
foreign corporation.
(3) Related person defined
For purposes of this section, a person is a related person with
respect to a controlled foreign corporation, if -
(A) such person is an individual, corporation, partnership,
trust, or estate which controls, or is controlled by, the
controlled foreign corporation, or
(B) such person is a corporation, partnership, trust, or
estate which is controlled by the same person or persons which
control the controlled foreign corporation.
For purposes of the preceding sentence, control means, with
respect to a corporation, the ownership, directly or indirectly,
of stock possessing more than 50 percent of the total voting
power of all classes of stock entitled to vote or of the total
value of stock of such corporation. In the case of a partnership,
trust, or estate, control means the ownership, directly or
indirectly, of more than 50 percent (by value) of the beneficial
interests in such partnership, trust, or estate. For purposes of
this paragraph, rules similar to the rules of section 958 shall
apply.
(4) Special rule for certain timber products
For purposes of subsection (a)(2), the term "foreign base
company sales income" includes any income (whether in the form of
profits, commissions, fees, or otherwise) derived in connection
with -
(A) the sale of any unprocessed timber referred to in section
865(b), or
(B) the milling of any such timber outside the United States.
Subpart G shall not apply to any amount treated as subpart F
income by reason of this paragraph.
(e) Foreign base company services income
(1) In general
For purposes of subsection (a)(3), the term "foreign base
company services income" means income (whether in the form of
compensation, commissions, fees, or otherwise) derived in
connection with the performance of technical, managerial,
engineering, architectural, scientific, skilled, industrial,
commercial, or like services which -
(A) are performed for or on behalf of any related person
(within the meaning of subsection (d)(3)), and
(B) are performed outside the country under the laws of which
the controlled foreign corporation is created or organized.
(2) Exception
Paragraph (1) shall not apply to income derived in connection
with the performance of services which are directly related to -
(A) the sale or exchange by the controlled foreign
corporation of property manufactured, produced, grown, or
extracted by it and which are performed before the time of the
sale or exchange, or
(B) an offer or effort to sell or exchange such property.
Paragraph (1) shall also not apply to income which is exempt
insurance income (as defined in section 953(e)) or which is not
treated as foreign personal holding income by reason of
subsection (c)(2)(C)(ii), (h), or (i).
[(f) Repealed. Pub. L. 108-357, title IV, Sec. 415(a)(2), Oct. 22,
2004, 118 Stat. 1511]
(g) Foreign base company oil related income
For purposes of this section -
(1) In general
Except as otherwise provided in this subsection, the term
"foreign base company oil related income" means foreign oil
related income (within the meaning of paragraphs (2) and (3) of
section 907(c)) other than income derived from a source within a
foreign country in connection with -
(A) oil or gas which was extracted from an oil or gas well
located in such foreign country, or
(B) oil, gas, or a primary product of oil or gas which is
sold by the foreign corporation or a related person for use or
consumption within such country or is loaded in such country on
a vessel or aircraft as fuel for such vessel or aircraft.
Such term shall not include any foreign personal holding company
income (as defined in subsection (c)).
(2) Paragraph (1) applies only where corporation has produced
1,000 barrels per day or more
(A) In general
The term "foreign base company oil related income" shall not
include any income of a foreign corporation if such corporation
is not a large oil producer for the taxable year.
(B) Large oil producer
For purposes of subparagraph (A), the term "large oil
producer" means any corporation if, for the taxable year or for
the preceding taxable year, the average daily production of
foreign crude oil and natural gas of the related group which
includes such corporation equaled or exceeded 1,000 barrels.
(C) Related group
The term "related group" means a group consisting of the
foreign corporation and any other person who is a related
person with respect to such corporation.
(D) Average daily production of foreign crude oil and natural
gas
For purposes of this paragraph, the average daily production
of foreign crude oil or natural gas of any related group for
any taxable year (and the conversion of cubic feet of natural
gas into barrels) shall be determined under rules similar to
the rules of section 613A except that only crude oil or natural
gas from a well located outside the United States shall be
taken into account.
(h) Special rule for income derived in the active conduct of
banking, financing, or similar businesses
(1) In general
For purposes of subsection (c)(1), foreign personal holding
company income shall not include qualified banking or financing
income of an eligible controlled foreign corporation.
(2) Eligible controlled foreign corporation
For purposes of this subsection -
(A) In general
The term "eligible controlled foreign corporation" means a
controlled foreign corporation which -
(i) is predominantly engaged in the active conduct of a
banking, financing, or similar business, and
(ii) conducts substantial activity with respect to such
business.
(B) Predominantly engaged
A controlled foreign corporation shall be treated as
predominantly engaged in the active conduct of a banking,
financing, or similar business if -
(i) more than 70 percent of the gross income of the
controlled foreign corporation is derived directly from the
active and regular conduct of a lending or finance business
from transactions with customers which are not related
persons,
(ii) it is engaged in the active conduct of a banking
business and is an institution licensed to do business as a
bank in the United States (or is any other corporation not so
licensed which is specified by the Secretary in regulations),
or
(iii) it is engaged in the active conduct of a securities
business and 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 (or is any other corporation
not so registered which is specified by the Secretary in
regulations).
(3) Qualified banking or financing income
For purposes of this subsection -
(A) In general
The term "qualified banking or financing income" means income
of an eligible controlled foreign corporation which -
(i) is derived in the active conduct of a banking,
financing, or similar business by -
(I) such eligible controlled foreign corporation, or
(II) a qualified business unit of such eligible
controlled foreign corporation,
(ii) is derived from one or more transactions -
(I) with customers located in a country other than the
United States, and
(II) substantially all of the activities in connection
with which are conducted directly by the corporation or
unit in its home country, and
(iii) is treated as earned by such corporation or unit in
its home country for purposes of such country's tax laws.
(B) Limitation on nonbanking and nonsecurities businesses
No income of an eligible controlled foreign corporation not
described in clause (ii) or (iii) of paragraph (2)(B) (or of a
qualified business unit of such corporation) shall be treated
as qualified banking or financing income unless more than 30
percent of such corporation's or unit's gross income is derived
directly from the active and regular conduct of a lending or
finance business from transactions with customers which are not
related persons and which are located within such corporation's
or unit's home country.
(C) Substantial activity requirement for cross border income
The term "qualified banking or financing income" shall not
include income derived from 1 or more transactions with
customers located in a country other than the home country of
the eligible controlled foreign corporation or a qualified
business unit of such corporation unless such corporation or
unit conducts substantial activity with respect to a banking,
financing, or similar business in its home country.
(D) Determinations made separately
For purposes of this paragraph, the qualified banking or
financing income of an eligible controlled foreign corporation
and each qualified business unit of such corporation shall be
determined separately for such corporation and each such unit
by taking into account -
(i) in the case of the eligible controlled foreign
corporation, only items of income, deduction, gain, or loss
and activities of such corporation not properly allocable or
attributable to any qualified business unit of such
corporation, and
(ii) in the case of a qualified business unit, only items
of income, deduction, gain, or loss and activities properly
allocable or attributable to such unit.
(E) Direct conduct of activities
For purposes of subparagraph (A)(ii)(II), an activity shall
be treated as conducted directly by an eligible controlled
foreign corporation or qualified business unit in its home
country if the activity is performed by employees of a related
person and -
(i) the related person is an eligible controlled foreign
corporation the home country of which is the same as the home
country of the corporation or unit to which subparagraph
(A)(ii)(II) is being applied,
(ii) the activity is performed in the home country of the
related person, and
(iii) the related person is compensated on an arm's-length
basis for the performance of the activity by its employees
and such compensation is treated as earned by such person in
its home country for purposes of the home country's tax laws.
(4) Lending or finance business
For purposes of this subsection, the term "lending or finance
business" means the business of -
(A) making loans,
(B) purchasing or discounting accounts receivable, notes, or
installment obligations,
(C) engaging in leasing (including entering into leases and
purchasing, servicing, and disposing of leases and leased
assets),
(D) issuing letters of credit or providing guarantees,
(E) providing charge and credit card services, or
(F) rendering services or making facilities available in
connection with activities described in subparagraphs (A)
through (E) carried on by -
(i) the corporation (or qualified business unit) rendering
services or making facilities available, or
(ii) another corporation (or qualified business unit of a
corporation) which is a member of the same affiliated group
(as defined in section 1504, but determined without regard to
section 1504(b)(3)).
(5) Other definitions
For purposes of this subsection -
(A) Customer
The term "customer" means, with respect to any controlled
foreign corporation or qualified business unit, any person
which has a customer relationship with such corporation or unit
and which is acting in its capacity as such.
(B) Home country
Except as provided in regulations -
(i) Controlled foreign corporation
The term "home country" means, with respect to any
controlled foreign corporation, the country under the laws of
which the corporation was created or organized.
(ii) Qualified business unit
The term "home country" means, with respect to any
qualified business unit, the country in which such unit
maintains its principal office.
(C) Located
The determination of where a customer is located shall be
made under rules prescribed by the Secretary.
(D) Qualified business unit
The term "qualified business unit" has the meaning given such
term by section 989(a).
(E) Related person
The term "related person" has the meaning given such term by
subsection (d)(3).
(6) Coordination with exception for dealers
Paragraph (1) shall not apply to income described in subsection
(c)(2)(C)(ii) of a dealer in securities (within the meaning of
section 475) which is an eligible controlled foreign corporation
described in paragraph (2)(B)(iii).
(7) Anti-abuse rules
For purposes of applying this subsection and subsection
(c)(2)(C)(ii) -
(A) there shall be disregarded any item of income, gain,
loss, or deduction with respect to any transaction or series of
transactions one of the principal purposes of which is
qualifying income or gain for the exclusion under this section,
including any transaction or series of transactions a principal
purpose of which is the acceleration or deferral of any item in
order to claim the benefits of such exclusion through the
application of this subsection,
(B) there shall be disregarded any item of income, gain,
loss, or deduction of an entity which is not engaged in regular
and continuous transactions with customers which are not
related persons,
(C) there shall be disregarded any item of income, gain,
loss, or deduction with respect to any transaction or series of
transactions utilizing, or doing business with -
(i) one or more entities in order to satisfy any home
country requirement under this subsection, or
(ii) a special purpose entity or arrangement, including a
securitization, financing, or similar entity or arrangement,
if one of the principal purposes of such transaction or series
of transactions is qualifying income or gain for the exclusion
under this subsection, and
(D) a related person, an officer, a director, or an employee
with respect to any controlled foreign corporation (or
qualified business unit) which would otherwise be treated as a
customer of such corporation or unit with respect to any
transaction shall not be so treated if a principal purpose of
such transaction is to satisfy any requirement of this
subsection.
(8) Regulations
The Secretary shall prescribe such regulations as may be
necessary or appropriate to carry out the purposes of this
subsection, subsection (c)(1)(B)(i), subsection (c)(2)(C)(ii),
and the last sentence of subsection (e)(2).
(9) Application
This subsection, subsection (c)(2)(C)(ii), and the last
sentence of subsection (e)(2) shall apply only to taxable years
of a foreign corporation beginning after December 31, 1998, and
before January 1, 2007, and to taxable years of United States
shareholders with or within which any such taxable year of such
foreign corporation ends.
(i) Special rule for income derived in the active conduct of
insurance business
(1) In general
For purposes of subsection (c)(1), foreign personal holding
company income shall not include qualified insurance income of a
qualifying insurance company.
(2) Qualified insurance income
The term "qualified insurance income" means income of a
qualifying insurance company which is -
(A) received from a person other than a related person
(within the meaning of subsection (d)(3)) and derived from the
investments made by a qualifying insurance company or a
qualifying insurance company branch of its reserves allocable
to exempt contracts or of 80 percent of its unearned premiums
from exempt contracts (as both are determined in the manner
prescribed under paragraph (4)), or
(B) received from a person other than a related person
(within the meaning of subsection (d)(3)) and derived from
investments made by a qualifying insurance company or a
qualifying insurance company branch of an amount of its assets
allocable to exempt contracts equal to -
(i) in the case of property, casualty, or health insurance
contracts, one-third of its premiums earned on such insurance
contracts during the taxable year (as defined in section
832(b)(4)), and
(ii) in the case of life insurance or annuity contracts, 10
percent of the reserves described in subparagraph (A) for
such contracts.
(3) Principles for determining insurance income
Except as provided by the Secretary, for purposes of
subparagraphs (A) and (B) of paragraph (2) -
(A) in the case of any contract which is a separate account-
type contract (including any variable contract not meeting the
requirements of section 817), income credited under such
contract shall be allocable only to such contract, and
(B) income not allocable under subparagraph (A) shall be
allocated ratably among contracts not described in subparagraph
(A).
(4) Methods for determining unearned premiums and reserves
For purposes of paragraph (2)(A) -
(A) Property and casualty contracts
The unearned premiums and reserves of a qualifying insurance
company or a qualifying insurance company branch with respect
to property, casualty, or health insurance contracts shall be
determined using the same methods and interest rates which
would be used if such company or branch were subject to tax
under subchapter L, except that -
(i) the interest rate determined for the functional
currency of the company or branch, and which, except as
provided by the Secretary, is calculated in the same manner
as the Federal mid-term rate under section 1274(d), shall be
substituted for the applicable Federal interest rate, and
(ii) such company or branch shall use the appropriate
foreign loss payment pattern.
(B) Life insurance and annuity contracts
(i) In general
Except as provided in clause (ii), the amount of the
reserve of a qualifying insurance company or qualifying
insurance company branch for any life insurance or annuity
contract shall be equal to the greater of -
(I) the net surrender value of such contract (as defined
in section 807(e)(1)(A)), or
(II) the reserve determined under paragraph (5).
(ii) Ruling request, etc.
The amount of the reserve under clause (i) shall be the
foreign statement reserve for the contract (less any
catastrophe, deficiency, equalization, or similar reserves),
if, pursuant to a ruling request submitted by the taxpayer or
as provided in published guidance, the Secretary determines
that the factors taken into account in determining the
foreign statement reserve provide an appropriate means of
measuring income.
(C) Limitation on reserves
In no event shall the reserve determined under this paragraph
for any contract as of any time exceed the amount which would
be taken into account with respect to such contract as of such
time in determining foreign statement reserves (less any
catastrophe, deficiency, equalization, or similar reserves).
(5) Amount of reserve
The amount of the reserve determined under this paragraph with
respect to any contract shall be determined in the same manner as
it would be determined if the qualifying insurance company or
qualifying insurance company branch were subject to tax under
subchapter L, except that in applying such subchapter -
(A) the interest rate determined for the functional currency
of the company or branch, and which, except as provided by the
Secretary, is calculated in the same manner as the Federal mid-
term rate under section 1274(d), shall be substituted for the
applicable Federal interest rate,
(B) the highest assumed interest rate permitted to be used in
determining foreign statement reserves shall be substituted for
the prevailing State assumed interest rate, and
(C) tables for mortality and morbidity which reasonably
reflect the current mortality and morbidity risks in the
company's or branch's home country shall be substituted for the
mortality and morbidity tables otherwise used for such
subchapter.
The Secretary may provide that the interest rate and mortality
and morbidity tables of a qualifying insurance company may be
used for 1 or more of its qualifying insurance company branches
when appropriate.
(6) Definitions
For purposes of this subsection, any term used in this
subsection which is also used in section 953(e) shall have the
meaning given such term by section 953.