SUBPART F EXEMPTION FOR ACTIVE FINANCING INCOME.

SEC. 1005. SUBPART F EXEMPTION FOR ACTIVE FINANCING INCOME. (a) Income Derived From Banking, Financing, or Similar Businesses.—Section 954(h) (relating to income derived in the active conduct of banking, financing, or similar businesses) is amended to read as follows: “(h) Special Rule for Income Derived in the Active Conduct of Banking, Financing, or Similar Businesses.— “(1) In general.—For purposes of subsection (c)(1), foreign personal holding company income shall not include qualified banking or financing income of an eligible controlled foreign corporation. “(2) Eligible controlled foreign corporation.—For purposes of this subsection— “(A) In general.—The term ‘eligible controlled foreign corporation’ means a controlled foreign corporation which— “(i) is predominantly engaged in the active conduct of a banking, financing, or similar business, and “(ii) conducts substantial activity with respect to such business. “(B) Predominantly engaged.—A controlled foreign corporation shall be treated as predominantly engaged in the active conduct of a banking, financing, or similar business if— “(i) more than 70 percent of the gross income of the controlled foreign corporation is derived directly from the active and regular conduct of a lending or finance business from transactions with customers which are not related persons, “(ii) it is engaged in the active conduct of a banking business and is an institution licensed to do business as a bank in the United States (or is any other 112 STAT. 2681–891corporation not so licensed which is specified by the Secretary in regulations), or “(iii) it is engaged in the active conduct of a securities business and 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 (or is any other corporation not so registered which is specified by the Secretary in regulations). “(3) Qualified banking or financing income.—For purposes of this subsection— “(A) In general.—The term ‘qualified banking or financing income’ means income of an eligible controlled foreign corporation which— “(i) is derived in the active conduct of a banking, financing, or similar business by— “(I) such eligible controlled foreign corporation, or “(II) a qualified business unit of such eligible controlled foreign corporation, “(ii) is derived from one or more transactions— “(I) with customers located in a country other than the United States, and “(II) substantially all of the activities in connection with which are conducted directly by the corporation or unit in its home country, and “(iii) is treated as earned by such corporation or unit in its home country for purposes of such country’s tax laws. “(B) Limitation on nonbanking and nonsecurities businesses.—No income of an eligible controlled foreign corporation not described in clause (ii) or (iii) of paragraph (2)(B) (or of a qualified business unit of such corporation) shall be treated as qualified banking or financing income unless more than 30 percent of such corporation’s or unit’s gross income is derived directly from the active and regular conduct of a lending or finance business from transactions with customers which are not related persons and which are located within such corporation’s or unit’s home country. “(C) Substantial activity requirement for cross border income.—The term ‘qualified banking or financing income’ shall not include income derived from 1 or more transactions with customers located in a country other than the home country of the eligible controlled foreign corporation or a qualified business unit of such corporation unless such corporation or unit conducts substantial activity with respect to a banking, financing, or similar business in its home country. “(D) Determinations made separately.—For purposes of this paragraph, the qualified banking or financing income of an eligible controlled foreign corporation and each qualified business unit of such corporation shall be determined separately for such corporation and each such unit by taking into account— “(i) in the case of the eligible controlled foreign corporation, only items of income, deduction, gain, or 112 STAT. 2681–892loss and activities of such corporation not properly allocable or attributable to any qualified business unit of such corporation, and “(ii) in the case of a qualified business unit, only items of income, deduction, gain, or loss and activities properly allocable or attributable to such unit. “(4) Lending or finance business.—For purposes of this subsection, the term lending or finance business’ means the business of— “(A) making loans, “(B) purchasing or discounting accounts receivable, notes, or installment obligations, “(C) engaging in leasing (including entering into leases and purchasing, servicing, and disposing of leases and leased assets), “(D) issuing letters of credit or providing guarantees, “(E) providing charge and credit card services, or “(F) rendering services or making facilities available in connection with activities described in subparagraphs (A) through (E) carried on by— “(i) the corporation (or qualified business unit) rendering services or making facilities available, or “(ii) another corporation (or qualified business unit of a corporation) which is a member of the same affiliated group (as defined in section 1504, but determined without regard to section 1504(b)(3)). “(5) Other definitions.—For purposes of this subsection— “(A) Customer.—The term ‘customer’ means, with respect to any controlled foreign corporation or qualified business unit, any person which has a customer relationship with such corporation or unit and which is acting in its capacity as such. “(B) Home country.—Except as provided in regulations— “(i) Controlled foreign corporation.—The term “home country” means, with respect to any controlled foreign corporation, the country under the laws of which the corporation was created or organized. “(ii) Qualified business unit.—The term ‘home country’ means, with respect to any qualified business unit, the country in which such unit maintains its principal office. “(C) Located.—The determination of where a customer is located shall be made under rules prescribed by the Secretary. “(D) Qualified business unit.—The term ‘qualified business unit’ has the meaning given such term by section 989(a). “(E) Related person.—The term ‘related person’ has the meaning given such term by subsection (d)(3). “(6) Coordination with exception for dealers.—Paragraph (1) shall not apply to income described in subsection (c)(2)(C)(ii) of a dealer in securities (within the meaning of section 475) which is an eligible controlled foreign corporation described in paragraph (2)(B)(iii). “(7) Anti-abuse rules.—For purposes of applying this subsection and subsection (c)(2)(C)(ii)—112 STAT. 2681–893 “(A) there shall be disregarded any item of income, gain, loss, or deduction with respect to any transaction or series of transactions one of the principal purposes of which is qualifying income or gain for the exclusion under this section, including any transaction or series of transactions a principal purpose of which is the acceleration or deferral of any item in order to claim the benefits of such exclusion through the application of this subsection, “(B) there shall be disregarded any item of income, gain, loss, or deduction of an entity which is not engaged in regular and continuous transactions with customers which are not related persons, “(C) there shall be disregarded any item of income, gain, loss, or deduction with respect to any transaction or series of transactions utilizing, or doing business with— “(i) one or more entities in order to satisfy any home country requirement under this subsection, or “(ii) a special purpose entity or arrangement, including a securitization, financing, or similar entity or arrangement, if one of the principal purposes of such transaction or series of transactions is qualifying income or gain for the exclusion under this subsection, and “(D) a related person, an officer, a director, or an employee with respect to any controlled foreign corporation (or qualified business unit) which would otherwise be treated as a customer of such corporation or unit with respect to any transaction shall not be so treated if a principal purpose of such transaction is to satisfy any requirement of this subsection. “(8) Regulations.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, subsection (c)(1)(B)(i), subsection (c)(2)(C)(ii), and the last sentence of subsection (e)(2). “(9) Application.—This subsection, subsection (c)(2)(C)(ii), and the last sentence of subsection (e)(2) shall apply only to the first taxable year of a foreign corporation beginning after December 31, 1998, and before January 1, 2000, and to taxable years of United States shareholders with or within which such taxable year of such foreign corporation ends.”. (b) Income Derived From Insurance Business.— (1) Income attributable to issuance or reinsurance.— (A) In general.—Section 953(a) (defining insurance income) is amended to read as follows: “(a) Insurance Income.— “(1) In general.—For purposes of section 952(a)(1), the term ‘insurance income’ means any income which— “(A) is attributable to the issuing (or reinsuring) of an insurance or annuity contract, and “(B) would (subject to the modifications provided by subsection (b)) be taxed under subchapter L of this chapter if such income were the income of a domestic insurance company. “(2) Exception.—Such term shall not include any exempt insurance income (as defined in subsection (e)).”.112 STAT. 2681–894 (B) Exempt insurance income.—Section 953 (relating to insurance income) is amended by adding at the end the following new subsection: “(e) Exempt insurance income.—For purposes of this section— “(1) Exempt insurance income defined.— “(A) In general.—The term ‘exempt insurance income’ means income derived by a qualifying insurance company which— “(i) is attributable to the issuing (or reinsuring) of an exempt contract by such company or a qualifying insurance company branch of such company, and “(ii) is treated as earned by such company or branch in its home country for purposes of such country’s tax laws. “(B) Exception for certain arrangements.—Such term shall not include income attributable to the issuing (or reinsuring) of an exempt contract as the result of any arrangement whereby another corporation receives a substantially equal amount of premiums or other consideration in respect of issuing (or reinsuring) a contract which is not an exempt contract. “(C) Determinations made separately.—For purposes of this subsection and section 954(i), the exempt insurance income and exempt contracts of a qualifying insurance company or any qualifying insurance company branch of such company shall be determined separately for such company and each such branch by taking into account— “(i) in the case of the qualifying insurance company, only items of income, deduction, gain, or loss, and activities of such company not properly allocable or attributable to any qualifying insurance company branch of such company, and “(ii) in the case of a qualifying insurance company branch, only items of income, deduction, gain, or loss and activities properly allocable or attributable to such branch. “(2) Exempt contract.— “(A) In general.—The term ‘exempt contract’ means an insurance or annuity contract issued or reinsured by a qualifying insurance company or qualifying insurance company branch in connection with property in, liability arising out of activity in, or the lives or health of residents of, a country other than the United States. “(B) Minimum home country income required.— “(i) In general.—No contract of a qualifying insurance company or of a qualifying insurance company branch shall be treated as an exempt contract unless such company or branch derives more than 30 percent of its net written premiums from exempt contracts (determined without regard to this subparagraph)— “(I) which cover applicable home country risks, and “(II) with respect to which no policyholder, insured, annuitant, or beneficiary is a related person (as defined in section 954(d)(3)).112 STAT. 2681–895 “(ii) Applicable home country risks.—The term ‘applicable home country risks’ means risks in connection with property in, liability arising out of activity in, or the lives or health of residents of, the home country of the qualifying insurance company or qualifying insurance company branch, as the case may be, issuing or reinsuring the contract covering the risks. “(C) Substantial activity requirements for cross border risks.—A contract issued by a qualifying insurance company or qualifying insurance company branch which covers risks other than applicable home country risks (as defined in subparagraph (B)(ii)) shall not be treated as an exempt contract unless such company or branch, as the case may be— “(i) conducts substantial activity with respect to an insurance business in its home country, and “(ii) performs in its home country substantially all of the activities necessary to give rise to the income generated by such contract. “(3) Qualifying insurance company.—The term ‘qualifying insurance company’ means any controlled foreign corporation which— “(A) is subject to regulation as an insurance (or reinsurance) company by its home country, and is licensed, authorized, or regulated by the applicable insurance regulatory body for its home country to sell insurance, reinsurance, or annuity contracts to persons other than related persons (within the meaning of section 954(d)(3)) in such home country, “(B) derives more than 50 percent of its aggregate net written premiums from the issuance or reinsurance by such controlled foreign corporation and each of its qualifying insurance company branches of contracts— “(i) covering applicable home country risks (as defined in paragraph (2)) of such corporation or branch, as the case may be, and “(ii) with respect to which no policyholder, insured, annuitant, or beneficiary is a related person (as defined in section 954(d)(3)), except that in the case of a branch, such premiums shall only be taken into account to the extent such premiums are treated as earned by such branch in its home country for purposes of such country’s tax laws, and “(C) is engaged in the insurance business and would be subject to tax under subchapter L if it were a domestic corporation. “(4) Qualifying insurance company branch.—The term ‘qualifying insurance company branch’ means a qualified business unit (within the meaning of section 989(a)) of a controlled foreign corporation if— “(A) such unit is licensed, authorized, or regulated by the applicable insurance regulatory body for its home country to sell insurance, reinsurance, or annuity contracts to persons other than related persons (within the meaning of section 954(d)(3)) in such home country, and112 STAT. 2681–896 “(B) such controlled foreign corporation is a qualifying insurance company, determined under paragraph (3) as if such unit were a qualifying insurance company branch. “(5) Life insurance or annuity contract.—For purposes of this section and section 954, the determination of whether a contract issued by a controlled foreign corporation or a qualified business unit (within the meaning of section 989(a)) is a life insurance contract or an annuity contract shall be made without regard to sections 72(s), 101(f), 817(h), and 7702 if— “(A) such contract is regulated as a life insurance or annuity contract by the corporation’s or unit’s home country, and “(B) no policyholder, insured, annuitant, or beneficiary with respect to the contract is a United States person. “(6) Home country.—For purposes of this subsection, except as provided in regulations— “(A) Controlled foreign corporation.—The term ‘home country" means, with respect to a controlled foreign corporation, the country in which such corporation is created or organized. “(B) Qualified business unit.—The term ‘home country’ means, with respect to a qualified business unit (as defined in section 989(a)), the country in which the principal office of such unit is located and in which such unit is licensed, authorized, or regulated by the applicable insurance regulatory body to sell insurance, reinsurance, or annuity contracts to persons other than related persons (as defined in section 954(d)(3)) in such country. “(7) Anti-abuse rules.—For purposes of applying this subsection and section 954(i)— “(A) the rules of section 954(h)(7) (other than subparagraph (B) thereof) shall apply, “(B) there shall be disregarded any item of income, gain, loss, or deduction of, or derived from, an entity which is not engaged in regular and continuous transactions with persons which are not related persons, “(C) there shall be disregarded any change in the method of computing reserves a principal purpose of which is the acceleration or deferral of any item in order to claim the benefits of this subsection or section 954(i), “(D) a contract of insurance or reinsurance shall not be treated as an exempt contract (and premiums from such contract shall not be taken into account for purposes of paragraph (2)(B) or (3)) if— “(i) any policyholder, insured, annuitant, or beneficiary is a resident of the United States and such contract was marketed to such resident and was written to cover a risk outside the United States, or “(ii) the contract covers risks located within and without the United States and the qualifying insurance company or qualifying insurance company branch does not maintain such contemporaneous records, and file such reports, with respect to such contract as the Secretary may require, “(E) the Secretary may prescribe rules for the allocation of contracts (and income from contracts) among 2 or more qualifying insurance company branches of a qualifying 112 STAT. 2681–897insurance company in order to clearly reflect the income of such branches, and “(F) premiums from a contract shall not be taken into account for purposes of paragraph (2)(B) or (3) if such contract reinsures a contract issued or reinsured by a related person (as defined in section 954(d)(3)). For purposes of subparagraph (D), the determination of where risks are located shall be made under the principles of section 953. “(8) Coordination with subsection (c).—In determining insurance income for purposes of subsection (c), exempt insurance income shall not include income derived from exempt contracts which cover risks other than applicable home country risks. “(9) Regulations.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection and section 954(i). “(10) Application.—This subsection and section 954(i) shall apply only to the first taxable year of a foreign corporation beginning after December 31, 1998, and before January 1, 2000, and to taxable years of United States shareholders with or within which such taxable year of such foreign corporation ends. “(11) Cross reference.— “For income exempt from foreign personal holding company income, see section 954(i).”. (2) Exemption from foreign personal holding company income.—Section 954 (defining foreign base company income) is amended by adding at the end the following new subsection: “(i) Special Rule for Income Derived in the Active Conduct of Insurance Business.— “(1) In general.—For purposes of subsection (c)(1), foreign personal holding company income shall not include qualified insurance income of a qualifying insurance company. “(2) Qualified insurance income.—The term ‘qualified insurance income’ means income of a qualifying insurance company which is— “(A) received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from the investments made by a qualifying insurance company or a qualifying insurance company branch of its reserves allocable to exempt contracts or of 80 percent of its unearned premiums from exempt contracts (as both are determined in the manner prescribed under paragraph (4)), or “(B) received from a person other than a related person (within the meaning of subsection (d)(3)) and derived from investments made by a qualifying insurance company or a qualifying insurance company branch of an amount of its assets allocable to exempt contracts equal to— “(i) in the case of property, casualty, or health insurance contracts, one-third of its premiums earned on such insurance contracts during the taxable year (as defined in section 832(b)(4)), and “(ii) in the case of life insurance or annuity contracts, 10 percent of the reserves described in subparagraph (A) for such contracts.112 STAT. 2681–898 “(3) Principles for determining insurance income.—Except as provided by the Secretary, for purposes of subparagraphs (A) and (B) of paragraph (2)— “(A) in the case of any contract which is a separate account-type contract (including any variable contract not meeting the requirements of section 817), income credited under such contract shall be allocable only to such contract, and “(B) income not allocable under subparagraph (A) shall be allocated ratably among contracts not described in subparagraph (A). “(4) Methods for determining unearned premiums and reserves.—For purposes of paragraph (2)(A)— “(A) Property and casualty contracts.—The unearned premiums and reserves of a qualifying insurance company or a qualifying insurance company branch with respect to property, casualty, or health insurance contracts shall be determined using the same methods and interest rates which would be used if such company or branch were subject to tax under subchapter L, except that— “(i) the interest rate determined for the functional currency of the company or branch, and which, except as provided by the Secretary, is calculated in the same manner as the Federal mid-term rate under section 1274(d), shall be substituted for the applicable Federal interest rate, and “(ii) such company or branch shall use the appropriate foreign loss payment pattern. “(B) Life insurance and annuity contracts.—The amount of the reserve of a qualifying insurance company or qualifying insurance company branch for any life insurance or annuity contract shall be equal to the greater of— “(i) the net surrender value of such contract (as defined in section 807(e)(1)(A)), or “(ii) the reserve determined under paragraph (5). “(C) Limitation on reserves.—In no event shall the reserve determined under this paragraph for any contract as of any time exceed the amount which would be taken into account with respect to such contract as of such time in determining foreign statement reserves (less any catastrophe, deficiency, equalization, or similar reserves). “(5) Amount of reserve.—The amount of the reserve determined under this paragraph with respect to any contract shall be determined in the same manner as it would be determined if the qualifying insurance company or qualifying insurance company branch were subject to tax under subchapter L, except that in applying such subchapter— “(A) the interest rate determined for the functional currency of the company or branch, and which, except as provided by the Secretary, is calculated in the same manner as the Federal mid-term rate under section 1274(d), shall be substituted for the applicable Federal interest rate, “(B) the highest assumed interest rate permitted to be used in determining foreign statement reserves shall 112 STAT. 2681–899be substituted for the prevailing State assumed interest rate, and “(C) tables for mortality and morbidity which reasonably reflect the current mortality and morbidity risks in the company’s or branch’s home country shall be substituted for the mortality and morbidity tables otherwise used for such subchapter. The Secretary may provide that the interest rate and mortality and morbidity tables of a qualifying insurance company may be used for 1 or more of its qualifying insurance company branches when appropriate. “(6) Definitions.—For purposes of this subsection, any term used in this subsection which is also used in section 953(e) shall have the meaning given such term by section 953.”. (3) Reserves.—Section 953(b) is amended by redesignating paragraph (3) as paragraph (4) and by inserting after paragraph (2) the following new paragraph: “(3) Reserves for any insurance or annuity contract shall be determined in the same manner as under section 954(i).”. (c) Special Rules for Dealers.—Section 954(c)(2)(C) is amended to read as follows: “(C) Exception for dealers.—Except as provided by regulations, in the case of a regular dealer in property which is property described in paragraph (1)(B), forward contracts, option contracts, or similar financial instruments (including notional principal contracts and all instruments referenced to commodities), there shall not be taken into account in computing foreign personal holding company income— “(i) any item of income, gain, deduction, or loss (other than any item described in subparagraph (A), (E), or (G) of paragraph (1)) from any transaction (including hedging transactions) entered into in the ordinary course of such dealer’s trade or business as such a dealer, and “(ii) if such dealer is a dealer in securities (within the meaning of section 475), any interest or dividend or equivalent amount described in subparagraph (E) or (G) of paragraph (1) from any transaction (including any hedging transaction or transaction described in section 956(c)(2)(J)) entered into in the ordinary course of such dealer’s trade or business as such a dealer in securities, but only if the income from the transaction is attributable to activities of the dealer in the country under the laws of which the dealer is created or organized (or in the case of a qualified business unit described in section 989(a), is attributable to activities of the unit in the country in which the unit both maintains its principal office and conducts substantial business activity).”. (d) Exemption From Foreign Base Company Services Income.—Paragraph (2) of section 954(e) is amended by inserting “or” at the end of subparagraph (A), by striking “, or” at the end of subparagraph (B) and inserting a period, by striking subparagraph (C), and by adding at the end the following new flush sentence: 112 STAT. 2681–900 “Paragraph (1) shall also not apply to income which is exempt insurance income (as defined in section 953(e)) or which is not treated as foreign personal holding income by reason of subsection (c)(2)(C)(ii), (h), or (i).”. (e) Exemption for Gain.—Section 954(c)(1)(B)(i) (relating to net gains from certain property transactions) is amended by inserting “other than property which gives rise to income not treated as foreign personal holding company income by reason of subsection (h) or (i) for the taxable year” before the comma at the end.