Treasury and the IRS, on July 10, released proposed regulations under Sections 1291, 1297, and 1298, which contain rules regarding passive foreign investment companies (PFICs). Broadly, the Proposed Regulations address the attribution of PFIC stock to US investors, the determination of a foreign corporation’s PFIC status, and the application of the PFIC insurance exception.
These Proposed Regulations are a welcome development that provide greater clarity on a number of open, broadly applicable issues related to determining whether a foreign corporation is a PFIC and whether a US shareholder owns PFIC stock, including clarification on the application of attribution rules when a partnership owns PFIC stock through a non-PFIC foreign corporation, provisions coordinating and clarifying the application of the PFIC look-through rules, and guidance regarding the elimination of certain intercompany assets and income for PFIC testing purposes. However, not all rules are taxpayer favorable, particularly the rule treating an interest of less-than-25% in a partnership as a passive asset and producing passive income for PFIC testing purposes, and the anti-abuse rules limiting the application of the Domestic Subsidiary Look-Through Rule of Section 1298(b)(7) in certain circumstances.
In the insurance company context, the Proposed Regulations provide detailed rules to apply the PFIC insurance exception, in certain cases with unexpected results.
Clients should carefully review the Proposed Regulations vis-à-vis their direct and indirect investments in foreign corporations to determine whether and how the definitional changes introduced by the new rules might impact the PFIC status of such foreign corporations and, ultimately, their US tax liability. The Proposed Regulations invite comments on a number of issues and clients affected by the new rules should consider providing comments during the comment period which ends September 9, 2019.
Managing Director, International Tax Services (ITS), PwC US