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Does a foreign insurance company qualify as PFIC? I (US

Does a foreign insurance company...
Does a foreign insurance company qualify as PFIC?
I (US person) have shares of a foreign captive insurance company. As pretty much any insurance company, this company holds most of its assets in various passive investments. Therefore it meets the "asset test" of a PFIC. Does it mean I must report my ownership and pay tax on the insurance company's income? Or (hopefully) there are exceptions for insurance companies?
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Answered in 1 hour by:
11/15/2017
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,903
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Section 1297(b)(2)(B) provides an exception whereby passive income does not include income derived in the active conduct of an insurance business by a corporation that is predominantly engaged in an insurance business.

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Additionally, Prop. Reg. Sec. 1.1297-4 defines the term “insurance business” as the business activity of issuing insurance and annuity contracts and the reinsuring of risks underwritten by insurance companies, together with investment activities and administrative services that are required to support or are substantially related to insurance contracts issued or reinsured.

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And although the income, if held purely for investment purposes by an individual or entity, would be considered passive, there's a difference here.

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Investment activities are required to support or are substantially related to insurance or annuity contracts issued or reinsured by the foreign corporation to the extent that income from the activities is earned from assets held by the foreign corporation to meet obligations under the contracts.

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Hence, for PFIC purposes, this is not passive income. The investment income becomes a part of the active business of the insurance company (again, necessary to meet its insurance contract obligations, hence active in that sense)

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As a heads up here, companies that have assets materially greater than their reserves such as those that underwrite with low frequency, high severity risks, e.g. catastrophic risks. These companies should consider how they will demonstrate their need for investment assets.

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But this is an audit situation. The general rule here is that this is an exception to PFIC reporting UNLESS the passive income can be shown NOT to be connected with the active business of underwriting and issuing annuity and life insurance contracts.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,903
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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