T.D. 9226

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Internal Revenue Bulletin:

2005-43 October 24, 2005

T.D. 9226

Stock Held by Foreign Insurance Companies



Internal Revenue Service (IRS), Treasury.


Final regulations.


This document contains final regulations relating to the determination of income of foreign insurance companies that is effectively connected with the conduct of a trade or business within the United States. The regulations provide that the exception to the asset-use test for stock shall not apply in determining whether the income, gain, or loss from portfolio stock held by foreign insurance companies constitutes effectively connected income.


Effective Date: These regulations are effective on October 3, 2005.


Sheila Ramaswamy, (202) 622-3870 (not a toll-free number).



On June 25, 2004, a notice of proposed rulemaking (REG-117307-04, 2004-2 C.B. 39) was published in the Federal Register (69 FR 35543). No requests for a public hearing were received, and no public hearing was held. The IRS received one written comment in response to the notice of proposed rulemaking. After consideration of the comment, the proposed regulation is adopted without change.

Explanation of Provisions and Summary of Comments

This Treasury decision adopts the language of the proposed regulation without change.

The IRS received one comment in response to the proposed regulation. The commentator requested further clarification regarding what constitutes an insurance company for federal income tax purposes. The IRS believes the issue of what constitutes an insurance company is outside the scope of this regulation, which solely relates to the application of the asset-use test to stock held by foreign insurance companies.

The commentator also expressed concern about the interaction of the proposed regulation with §1.864-5(a), which provides, generally, that foreign source income, such as a foreign-source dividend or gain, cannot constitute U.S. effectively connected income in circumstances in which a U.S.-source dividend or gain would not constitute U.S. effectively connected income. Accordingly, the commentator is concerned that the rule in the regulations will also expand the category of foreign-source dividends or gains that may constitute effectively connected income. That is true and the Treasury Department and the IRS believe this is the appropriate result.

The IRS invited comments whether the 10 percent threshold provided in the proposed regulation was an appropriate standard for determining whether stock is a portfolio investment. The commentator stated that it was possible for insurance companies to make a strategic investment in a corporation at a level below 10 percent of the vote or value of the corporation, such as by purchasing a special class of shares that conveyed the power to elect directors. The commentator recommended creating a rebuttable presumption of portfolio status.

We do not believe that treating the 10 percent threshold as a rebuttable presumption is appropriate. The 10 percent threshold provides a reasonable method for identifying portfolio stock held by a branch of a foreign life insurance company.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because these regulations do not impose a collection of information on small entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding this regulation was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Proposed Amendment to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:


Paragraph 1. The authority citation for part 1 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. In §1.864-4, paragraph (c)(2)(iii)(b) is revised to read as follows:

§1.864-4 U.S. source income effectively connected with U.S. business. * * * * *

(c) * * *

(2) * * *

(iii) * * *

(b) Stock held by foreign insurance companies. This paragraph (c)(2)(iii) shall not apply to stock of a corporation (whether domestic or foreign) held by a foreign insurance company unless the foreign insurance company owns 10 percent or more of the total voting power or value of all classes of stock of such corporation. For purposes of this section, section 318(a) shall be applied in determining ownership, except that in applying section 318(a)(2)(C), the phrase “10 percent” is used instead of the phrase “50 percent.”

* * * * *

Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.

Approved August 9, 2005.

Eric Solomon,
Acting Deputy Assistant Secretary for Tax Policy.

Note (Filed by the Office of the Federal Register on September 30, 2005, 8:45 a.m., and published in the issue of the Federal Register for October 3, 2005, 70 F.R. 57509)

Drafting Information

The principal author of this regulation is Sheila Ramaswamy, Office of Associate Chief Counsel (International). However, other personnel from the IRS and Treasury Department participated in their development.

* * * * *

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