EXEMPTION FOR ACTIVE FINANCING INCOME.

SEC. 1175. EXEMPTION FOR ACTIVE FINANCING INCOME. (a) Exemption From Foreign Personal Holding Company Income.—Section 954 is amended by adding at the end the following new subsection: “(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 income which is— “(A) derived in the active conduct by a controlled foreign corporation of a banking, financing, or similar business, but only if the corporation is predominantly engaged in the active conduct of such business, “(B) 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 of its reserves or of 80 percent of its unearned premiums (as both are determined in the manner prescribed under paragraph (4)), or “(C) 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 of an amount of its assets equal to— “(i) in the case of contracts regulated in the country in which sold as 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 contracts regulated in the country in which sold as life insurance or annuity contracts, the greater of— “(I) 10 percent of the reserves described in subparagraph (B) for such contracts, or “(II) in the case of a qualifying insurance company which is a start-up company, $10,000,000. “(2) Principles for determining applicable income.— “(A) Banking and financing income—The determination as to whether income is described in paragraph (1)(A) shall be made— “(i) except as provided in clause (ii), in accordance with the applicable principles of section 904(d)(2)(C)(ii), except that such income shall include income from all leases entered into in the ordinary course of the active conduct of a banking, financing, or similar business, and “(ii) in the case of a corporation described in paragraph (3)(B), in accordance with the applicable principles of section 1296(b) (as in effect on the day before the enactment of the Taxpayer Relief Act of 1997) for determining what is not passive income. “(B) Insurance income.—Under rules prescribed by the Secretary, for purposes of paragraphs (1) (B) and (C)— “(i) in the case of contracts which are separate account-type contracts (including variable contracts not meeting the requirements of section 817), only income specifically allocable to such contracts shall be taken into account, and111 STAT. 991 “(ii) in the case of other contracts, income not allocable under clause (i) shall be allocated ratably among such contracts. “(C) Look-thru rules.—The Secretary shall prescribe regulations consistent with the principles of section 904(d)(3) which provide that dividends, interest, income equivalent to interest, rents, or royalties received or accrued from a related person (within the meaning of subsection (d)(3)) shall be subject to look-thru treatment for purposes of this subsection. “(3) Predominantly engaged.—For purposes of paragraph (1)(A), a corporation shall be deemed predominantly engaged in the active conduct of a banking, financing, or similar business only if— “(A) more than 70 percent of its gross income is derived from such business from transactions with persons which are not related persons (as defined in subsection (d)(3)) and which are located within the country under the laws of which the controlled foreign corporation is created or organized, or “(B) the corporation is— “(i) engaged in the active conduct of a banking or securities business (within the meaning of section 1296(b), as in effect before the enactment of the Taxpayer Relief Act of 1997), or “(ii) a qualified bank affiliate or a qualified securities affiliate (within the meaning of the proposed regulations under such section 1296(b)). “(4) Methods for determining unearned premiums and reserves.—For purposes of paragraph (1)(B)— “(A) Property and casualty contracts.—The unearned premiums and reserves of a qualifying insurance company 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 were subject to tax under subchapter L. “(B) Life insurance and annuity contracts.—The reserves of a qualifying insurance company with respect to life insurance or annuity contracts shall be determined under the method described in paragraph (5) which such company elects to apply for purposes of this paragraph. Such election shall he made at such time and in such manner as the Secretary may prescribe and, once made, shall be irrevocable without the consent of the Secretary. “(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 annual statement reserves (less any catastrophe or deficiency reserves). “(5) Methods.—The methods described in this paragraph are as follows: “(A) U.S. method.—The method which would apply if the qualifying insurance company were subject to tax under subchapter L, except that the interest rate used shall be an interest rate determined for the foreign country in which such company is created or organized and which 111 STAT. 992is calculated in the same manner as the Federal midterm rate under section 1274(d). “(B) Foreign method.—A preliminary term method, except that the interest rate used shall be the interest rate determined for the foreign country in which such company is created or organized and which is calculated in the same manner as the Federal mid-term rate under section 1274(d). If a qualifying insurance company uses such a preliminary term method with respect to contracts insuring risks located in such foreign country, such method shall apply if such company elects the method under this clause. “(C) Cash surrender value.—A method under which reserves are equal to the net surrender value (as defined in section 807(e)(1)(A)) of the contract. “(6) Definitions.—For purposes of this subsection— “(A) Terms relating to insurance companies.— “(i) Qualifying insurance company.—The term ‘qualifying insurance company’ means any entity which— “(I) is subject to regulation as an insurance company under the laws of its country of incorporation, “(II) realizes at least 50 percent of its net written premiums from the insurance or reinsurance of risks located within the country in which such entity is created or organized, and “(III) is engaged in the active conduct of an insurance business and would be subject to tax under subchapter L if it were a domestic corporation. “(ii) Start-up company.—A qualifying insurance company shall be treated as a start-up company if such company (and any predecessor) has not been engaged in the active conduct of an insurance business for more than 5 years as of the beginning of the taxable year of such company. “(B) Located.—For purposes of paragraph (3)(A)— “(i) In general.—A person shall be treated as located— “(I) except as provided in subclause (II), within the country in which it maintains an office or other fixed place of business through which it engages in a trade or business and by which the transaction is effected, or “(II) in the case of a natural person, within the country in which such person is physically located when such person enters into a transaction, “(ii) Special rule for qualified business units.—Gross income derived by a corporation’s qualified business unit (within the meaning of section 989(a)) from transactions with persons which are not related persons (as defined in subsection (d)(3)) and which are located in the country in which the qualified business unit both maintains its principal office and conducts substantial business activity shall be treated as derived from transactions with persons which are 111 STAT. 993not related persons (as defined in subsection (d)(3)) and which are located within the country under the laws of which the controlled foreign corporation is created or organized. “(7) Anti-abuse rules.—For purposes of applying this subsection, 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 change in the method of computing reserves or any other 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. “(8) Coordination with section 953.—This subsection shall not apply to investment income allocable to contracts that insure related party risks or risks located in a foreign country other than the country in which the qualifying insurance company is created or organized. “(9) Application.—This subsection shall apply to the first full taxable year of a foreign corporation beginning after December 31, 1997, and before January 1, 1999, and to taxable years of United States shareholders with or within which such taxable year of such foreign corporation ends.”. (b) Exemption From Foreign Base Company Services Income.—Paragraph (2) of section 954(e) is amended by striking “or” at the end of subparagraph (A), by striking the period at the end of subparagraph (B) and inserting “, or”, and by adding at the end the following: “(C) in the case of taxable years described in subsection (h)(8), the active conduct by a controlled foreign corporation of a banking, financing, insurance, or similar business, but only if the corporation is predominantly engaged in the active conduct of such business (within the meaning of subsection (h)(3)) or is a qualifying insurance company.”. (c) Effective Date.—The amendments made by this section shall apply to the first full taxable year of a foreign corporation beginning after December 31, 1997, and before January 1, 1999, and to taxable years of United States shareholders with or within which such taxable year of such foreign corporation ends.