EARNINGS INVESTED IN EXCESS PASSIVE ASSETS.

SEC. 13231. EARNINGS INVESTED IN EXCESS PASSIVE ASSETS. (a) General Rule.— Paragraph (1) of section 951(a) (relating to amounts included in gross income of United States shareholders) is amended by striking “and” at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting “; and”, and by adding at the end thereof the following new subparagraph: “(C) the amount determined under section 956A with respect to such shareholder for such year (but only to the extent not excluded from gross income under section 959(a)(3)).” 107 STAT. 496 (b) Amount of Inclusion.— Subpart F of part III of subchapter N of chapter 1 is amended by inserting after section 966 the following new section: “SEC. 956A. EARNINGS INVESTED IN EXCESS PASSIVE ASSETS. “(a) General Rule.— In the case of any controlled foreign corporation, the amount determined under this section with respect to any United States shareholder for any taxable year is the lesser of— “(1) the excess (if any) of— “(A) such shareholder’s pro rata share of the amount of the controlled foreign corporation’s excess passive assets for such taxable year, over “(B) the amount of earnings and profits described in section 959(c)(1)(B) with respect to such shareholder, or “(2) such shareholder’s pro rata share of the applicable earnings of such controlled foreign corporation determined after the application of section 951(a)(1)(B). “(b) Applicable Earnings.— For purposes of this section, the term ‘applicable earnings’ means, with respect to any controlled foreign corporation, the sum of— “(1) the amount referred to in section 316(a)(1) to the extent such amount was accumulated in taxable years beginning after September 30, 1993, and “(2) the amount referred to in section 316(a)(2), but reduced by distributions made during the taxable year and reduced by the earnings and profits described in section 959(c)(1) to the extent that the earnings and profits so described were accumulated in taxable years beginning after September 30, 1993. “(c) Excess Passive Assets.— For purposes of this section— “(1) In general.— The excess passive assets of any controlled foreign corporation for any taxable year is the excess (if any) of— “(A) the average of the amounts of passive assets held by such corporation as of the close of each quarter of such taxable year, over “(B) 25 percent of the average of the amounts of total assets held by such corporation as of the close of each quarter of such taxable year. For purposes of the preceding sentence, the amount taken into account with respect to any asset shall be its adjusted basis as determined for purposes of computing earnings and profits. “(2) Passive asset.— “(A) In general.— Except as otherwise provided in this section, the term ‘passive asset’ means any asset held by the controlled foreign corporation which produces passive income (as defined in section 1296(b)) or is held for the production of such income. “(B) Coordination with section 956.— The term ‘passive asset’ shall not include any United States property (as defined in section 956). “(3) Certain rules to apply.— For purposes of this subsection, the rules of the following provisions shall apply: “(A) Section 1296(c) (relating to look-thru rules). “(B) Section 1297(d) (relating to leasing rules). “(C) Section 1297(e) (relating to intangible property). 107 STAT. 497 “(d) Treatment of Certain Groups of Controlled Foreign Corporations.— “(1) In general.— For purposes of applying subsection (c)— “(A) all controlled foreign corporations which are members of the same CFC group shall be treated as 1 controlled foreign corporation, and “(B) the amount of the excess passive assets determined with respect to such 1 corporation shall be allocated among the controlled foreign corporations which are members of such group in proportion to their respective amounts of applicable earnings. “(2) OFC group.— For purposes of paragraph (1), the term ‘CFC group’ means 1 or more chains of controlled foreign corporations connected through stock ownership with a top tier corporation which is a controlled foreign corporation, but only if— “(A) the top tier corporation owns directly more than 50 percent (by vote or value) of the stock of at least 1 of the other controlled foreign corporations, and “(B) more than 50 percent (by vote or value) of the stock of each of the controlled foreign corporations (other than the top tier corporation) is owned (directly or indirectly) by one or more other members of the group. “(e) Special Rule Where Corporation Ceases To Be Controlled Foreign Corporation During Taxable Year.— If any foreign corporation ceases to be a controlled foreign corporation during any taxable year— “(1) the determination of any United States shareholder’s pro rata share shall be made on the basis of stock owned within the meaning of section 958(a)) by such shareholder on the last day during the taxable year on which the foreign corporation is a controlled foreign corporation, “(2) the amount of such corporation’s excess passive assets for such taxable year shall be determined by only taking into account quarters ending on or before such last day, and “(3) in determining applicable earnings, the amount taken into account by reason of being described in paragraph (2) of section 316(a) shall be the portion of the amount so described which is allocable (on a pro rata basis) to the part of such year during which the corporation is a controlled foreign corporation. “(f) Regulations.— The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to prevent the avoidance of the provisions of this section through reorganizations or otherwise.” (c) Previously Taxed income Rules.— (1) In general.— Subsection (a) of section 959 (relating to exclusion from gross income of previously taxed earnings and profits) is amended by striking “or” at the end of paragraph (1), by adding “or” at the end of paragraph (2), and by inserting after paragraph (2) the following new paragraph: “(3) such amounts would, but for this subsection, be included under section 951(a)(1)(C) in the gross income of,”. (2) Allocation rules.— (A) Subsection (a) of section 959 is amended by adding at the end thereof the following new sentence: “The rules of subsection (c) shall apply for purposes of paragraph 107 STAT. 498(1) of this subsection and the rules of subsection (0 shall apply for purposes of paragraphs (2) and (3) of this subsection.”. (B) Section 959 is amended by adding at the end thereof the following new subsection: “(f) Allocation Rules for Certain Inclusions.— “(1) In general.— For purposes of this section— “(A) amounts that would be included under subparagraph (B) of section 951(a)(1) (determined without regard to this section) shall be treated as attributable first to earnings described in subsection (c)(2), and then to earnings described in subsection (c)(3), and “(B) amounts that would be included under subparagraph (C) of section 951(a)(1) (determined without regard to this section) shall be treated as attributable first to earnings described in subsection (c)(2) to the extent the earnings so described were accumulated in taxable years beginning after September 30, 1993, and then to earnings described in subsection (c)(3). “(2) Treatment of distributions.— In applying this section, actual distributions shall be taken into account before amounts that would be included under subparagraphs (B) and (C) of section 951(a)(1) (determined without regard to this section).” (C) Paragraph (1) of section 959(c) is amended to read as follows: “(1) first to the aggregate of— “(A) earnings and profits attributable to amounts included in gross income under section 951(a)(1)(B) (or which would have been included except for subsection (a)(2) of this section), and “(B) earnings and profits attributable to amounts included in gross income under section 951(a)(1)(C) (or which would have been included except for subsection (a)(3) of this section), with any distribution being allocated between earnings and profits described in subparagraph (A) and earnings and profits described in subparagraph (B) proportionately on the basis of the respective amounts of such earnings and profits,”. (3) Coordination with pfic inclusions.— Subsection (c) of section 1293 is amended by adding at the end thereof the following new sentence: “If the passive foreign investment company is a controlled foreign corporation (as defined in section 957(a)), the preceding sentence shall not apply to any United States shareholder (as defined in section 951(b)) in such corporation, and, in applying section 959 to any such shareholder, any inclusion under this section shall be treated as an inclusion under section 951(a)(1)(A).”. (4) Conforming amendments.— (A) Subsections (a) and (b) of section 959 are each amended by striking “earnings and profits for a taxable year” and inserting “earnings and profits”. (B) Paragraph (2) of section 959(c) is amended to read as follows: “(2) then to earnings and profits attributable to amounts included in gross income under section 951(a)(1)(A) (but reduced by amounts not included under subparagraph (B) or (C) of 107 STAT. 499section 951(a)(1) because of the exclusions in paragraphs (2) and (3) of subsection (a) of this section), and” (C) Subsection (b) of section 989 is amended by striking “section 951(a)(1)(B)” and inserting “subparagraph (B) or (C) of section 951(a)(1)”. (d) Modifications to Passive Foreign Investment Company Rules.— (1) Adjusted basis used in certain determinations.— Subsection (a) of section 1296 is amended by striking the material following paragraph (2) and inserting the following: “In the case of a controlled foreign corporation (or any other foreign corporation if such corporation so elects), the determination under paragraph (2) shall be based on the adjusted bases (as determined for purposes of computing earnings and profits) of its assets in lieu of their value. Such an election, once made, may be revoked only with the consent of the Secretary.” (2) Treatment of certain subpart f inclusions.— Subsection (b) of section 1297 is amended by adding at the end thereof the following new paragraph: “(9) Treatment of certain subpart f inclusions.— Any amount included in gross income under subparagraph (B) or (C) of section 951(a)(1) shall be treated as a distribution received with respect to the stock.” (3) Treatment of certain dealers in securities.— Subsection (b) of section 1296 is amended by adding at the end thereof the following new paragraph: “(3) Treatment of certain dealers in securities.— “(A) In general.— In the case of any foreign corporation which is a controlled foreign corporation (as defined in section 957(a)), the term ‘passive income’ does not include any income derived in the active conduct of a securities business by such corporation if such corporation 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. To the extent provided in regulations, such term shall not include any income derived in the active conduct of a securities business by a controlled foreign corporation which is not so registered. “(B) Application of look-thru rules.— For purposes of paragraph (2)(C), rules similar to the rules of subparagraph (A) of this paragraph shall apply in determining whether any income of a related person (whether or not a corporation) is passive income. “(C) Limitation.— The preceding provisions of this paragraph shall only apply in the case of persons who are United States shareholders (as defined in section 951(b)) in the controlled foreign corporation.” (4) Leasing and intangible asset rules.— Section 1297 is amended by redesignating subsection (d) as subsection (f) and by inserting after subsection (c) the following new subsections: “(d) Treatment of Certain Leased Property.— For purposes of this part— “(1) In general.— Any tangible personal property with respect to which a foreign corporation is the lessee under a 107 STAT. 500lease with a term of at least 12 months shall be treated as an asset actually held by such corporation. “(2) Determination of adjusted basis.— “(A) In general.— The adjusted basis of any asset to which paragraph (1) applies shall be the unamortized portion (as determined under regulations prescribed by the Secretary) of the present value of the payments under the lease for the use of such property. “(B) Present value.— For purposes of subparagraph (A), the present value of payments described in subparagraph (A) shall be determined in the manner provided in regulations prescribed by the Secretary— “(i) as of the beginning of the lease term, and “(ii) except as provided in such regulations, by using a discount rate equal to the applicable Federal rate determined under section 1274(d)— “(I) by substituting the lease term for the term of the debt instrument, and “(II) without regard to paragraph (2) or (3) thereof. “(3) Exceptions.— This subsection shall not apply in any case where— “(A) the lessor is a related person (as defined in section 954(d)(3)) with respect to the foreign corporation, or “(B) a principal purpose of leasing the property was to avoid the provisions of this part or section 956A. “(e) Special Rules For Certain Intangibles.— “(1) Research expenditures.— The adjusted basis of the total assets of a controlled foreign corporation shall be increased by the research or experimental expenditures (within the meaning of section 174) paid or incurred by such foreign corporation during the taxable year and the preceding 2 taxable years. Any expenditure otherwise taken into account under the preceding sentence shall be reduced by the amount of any reimbursement received by the controlled foreign corporation with respect to such expenditure. “(2) Certain licensed intangibles.— “(A) In general.— In the case of any intangible property (as defined in section 936(h)(3)9B)) with respect to which a controlled foreign corporation is a licensee and which is used by such foreign corporation in the active conduct of a trade or business, the adjusted basis of the total assets of such foreign corporation shall be increased by an amount equal to 300 percent of the payments made during the taxable year by such foreign corporation for the use of such intangible property. “(B) Exceptions.— Subparagraph (A) shall not apply to— “(i) any payments to a foreign person if such foreign person is a related person (as defined in section 954(d)(3)) with respect to the controlled foreign corporation, and “(ii) any payments under a license if a principal purpose of entering into such license was to avoid the provisons of this part or section 956A. 107 STAT. 501 “(3) Controlled foreign corporation.— For purposes of this subsection, the term ‘controlled foreign corporation’ has the meaning given such term by section 957(a).” (e) Effective Date.— The amendments made by this section shall apply to taxable years of foreign corporations beginning after September 30, 1993, and to taxable years of United States share-holders in which or with which such taxable years of foreign corporations end.