On July 10, 2019, the U.S. Internal Revenue Service and Department of the Treasury released proposed regulations relating to passive foreign investment companies (PFICs) that will be of keen interest to foreign insurance companies and their investors, insurance-linked securities funds and other participants in transactions involving foreign insurers.1 The proposed regulations provide guidance relating to changes in the PFIC regime made by the 2017 Tax Cuts and Jobs Act, address the application and interaction of certain “look-through” rules contained in the Internal Revenue Code and introduce new rules relating to the determination of the “active conduct” test.
Key aspects of the proposed regulations include:
- Proposed standards for determining whether a foreign insurance company is a “qualifying insurance corporation” (QIC), including whether it
- is “predominantly engaged in the insurance business,”
- has “applicable insurance liabilities” that exceed 25% of its total assets; or
- failed to satisfy the 25% test “solely due to runoff-related or rating-related circumstances.”
- A proposed standard for determining whether a QIC is engaged in the “active conduct” of an insurance business, including a proposal that would deny the insurance exception to companies that pay significant fees to outside service providers for underwriting and asset management.
- Provisions coordinating and clarifying the application of the look-through rules that apply to 25% owned corporations and the special look-through rules for 25%-owned domestic corporations.
- Guidance regarding the elimination of certain intercompany assets and income (e.g., stock of subsidiary, intercompany debt) in determining the percentage of passive income and assets.
- Guidance regarding the treatment of the income and assets of direct and indirect domestic insurance subsidiaries in determining the income and assets of a tested foreign corporation.
The new proposed regulations withdraw a set of proposed regulations that were issued in April 2015. The new proposed regulations would be effective once finalized, but taxpayers may choose to apply proposed Treas. Reg. 1.1297-4 (regarding whether a foreign corporation is a QIC) and Treas. Reg. 1.1297-5 (regarding the exception from the definition of passive income for active insurance income) to taxable years beginning after December 31, 2017, as if they were final, provided that the rules are applied consistently.
Sidley expects to publish a supplemental analysis once we have completed a more in-depth review of the proposed regulations.
1 The proposed regulations include rules applicable to all industries; this Sidley Update will focus on the portions of the proposed regulations most relevant to the insurance industry.
