26 U.S.C. § 1297 — Passive foreign investment company

(a) General rule. Unless this subpart provides otherwise, a passive foreign investment company is a foreign corporation^* if (1) at least 75 percent of its gross income for the taxable year^* is passive income, or (2) the average percentage of its assets during the year that produce passive income or are held to produce it is at least 50 percent, measured under subsection (e).

(b) Passive income. (1) Generally, “passive income” means income of a kind that would be foreign personal holding company income under section 954(c). (2) Unless regulations provide otherwise, it does not include income (A) from the active conduct of banking by a United States-licensed bank, or as regulations provide, another corporation; (B) from the active conduct of insurance by a qualifying insurance corporation; (C) consisting of interest, dividends, rent, or royalties received from a related person, to the extent properly allocated under regulations to the related person's nonpassive income; or (D) export-trade income of an export-trade corporation under section 971. For (C), “related person” has section 954(d)(3)'s meaning, replacing “controlled foreign corporation^*” with “foreign corporation.”

(c) Look-through. If a foreign corporation owns at least 25 percent by value of another corporation, it is treated as holding its proportionate share of that corporation's assets and receiving directly its proportionate share of its income.

(d) Controlled foreign corporation exception. (1) A corporation is not treated as a PFIC with respect to a shareholder^* during the qualified portion of the shareholder's holding period. (2) The qualified portion is the part after December 31, 1997, when the shareholder is a United States shareholder^* and the corporation is a controlled foreign corporation. (3) If that portion ends after that date, the holding period is treated as beginning the next day, unless (B) the stock^* was already PFIC stock before the qualified portion and no section 1298(b)(1) election is made. (4) The rule does not apply to stock treated as owned under section 1298(a)(4) unless the person shows that a non-tax-exempt United States shareholder owns it under section 958(a).

(e) Asset measurement. (1) Use asset value if the corporation is publicly traded or paragraph (2) does not apply. (2) Use adjusted bases used for earnings-and-profits purposes if the corporation is not publicly traded and is a controlled foreign corporation or elects this method. The election can be revoked only with the Secretary's consent. (3) A foreign corporation is publicly traded if its stock is regularly traded on an SEC-registered national exchange, the section 11A national market system, or another market the Secretary^* finds adequate.

(f) Qualifying insurance corporation. (1) It is a foreign corporation that would be taxed under subchapter L if domestic and whose applicable insurance liabilities exceed 25 percent of total assets, based on the applicable financial statement for the last year ending in or with the taxable year. (2) If it fails only because the percentage is 25 percent or less, a United States person^* that owns stock in the corporation may elect to treat that stock as stock of a qualifying insurance corporation if the percentage is at least 10 percent and regulations, considering the facts, show that the corporation is mainly in insurance and the failure results only from runoff-related or rating-related circumstances. (3) Applicable insurance liabilities are (A) loss and loss-adjustment expenses and reserves, other than deficiency^*, contingency, or unearned-premium reserves, for life and health risks and claims under mortality or morbidity coverage; but (B) each amount is limited to the lesser of the amount reported to the insurance regulator, or required by law or regulation if lower, and the amount determined under the Secretary's regulations. (4) An applicable financial statement is a financial-reporting statement based on generally accepted accounting principles; if none, international financial reporting standards; or if neither exists, unless regulations say otherwise, the annual statement required by the insurance regulator. The applicable insurance regulatory body is the legally established entity that licenses, authorizes, or regulates the insurance business and receives that statement.