Special rules

# (a) Attribution of ownership

For purposes of this part— (1) Attribution to United States persons This subsection— (A) shall apply to the extent that the effect is to treat stock of a passive foreign investment company as owned by a United States person, and (B) except to the extent provided in regulations, shall not apply to treat stock owned (or treated as owned under this subsection) by a United States person as owned by any other person.

(2) Corporations (A) In general If 50 percent or more in value of the stock of a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned directly or indirectly by or for such corporation in that proportion which the value of the stock which such person so owns bears to the value of all stock in the corporation. (B) 50-percent limitation not to apply to PFIC For purposes of determining whether a shareholder of a passive foreign investment company is treated as owning stock owned directly or indirectly by or for such company, subparagraph (A) shall be applied without regard to the 50-percent limitation contained therein. Section 1297(d) shall not apply in determining whether a corporation is a passive foreign investment company for purposes of this subparagraph.

(3) Partnerships, etc. Stock owned, directly or indirectly, by or for a partnership, estate, or trust shall be considered as being owned proportionately by its partners or beneficiaries.

(4) Options To the extent provided in regulations, if any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.

(5) Successive application Stock considered to be owned by a person by reason of the application of paragraph (2), (3), or (4) shall, for purposes of applying such paragraphs, be considered as actually owned by such person.

# (b) Other special rules

For purposes of this part— (1) Time for determination Stock held by a taxpayer shall be treated as stock in a passive foreign investment company if, at any time during the holding period of the taxpayer with respect to such stock, such corporation (or any predecessor) was a passive foreign investment company which was not a qualified electing fund. The preceding sentence shall not apply if the taxpayer elects to recognize gain (as of the last day of the last taxable year for which the company was a passive foreign investment company (determined without regard to the preceding sentence)) under rules similar to the rules of section 1291(d)(2).

(2) Certain corporations not treated as PFIC’s during start-up year A corporation shall not be treated as a passive foreign investment company for the first taxable year such corporation has gross income (hereinafter in this paragraph referred to as the “start-up year”) if— (A) no predecessor of such corporation was a passive foreign investment company, (B) it is established to the satisfaction of the Secretary that such corporation will not be a passive foreign investment company for either of the 1st 2 taxable years following the start-up year, and (C) such corporation is not a passive foreign investment company for either of the 1st 2 taxable years following the start-up year.

(3) Certain corporations changing businesses A corporation shall not be treated as a passive foreign investment company for any taxable year if— (A) neither such corporation (nor any predecessor) was a passive foreign investment company for any prior taxable year, (B) it is established to the satisfaction of the Secretary that— (i) substantially all of the passive income of the corporation for the taxable year is attributable to proceeds from the disposition of 1 or more active trades or businesses, and (ii) such corporation will not be a passive foreign investment company for either of the 1st 2 taxable years following such taxable year, and (C) such corporation is not a passive foreign investment company for either of such 2 taxable years.

(4) Separate interests treated as separate corporations Under regulations prescribed by the Secretary, where necessary to carry out the purposes of this part, separate classes of stock (or other interests) in a corporation shall be treated as interests in separate corporations.

(5) Application of part where stock held by other entity (A) In general Under regulations, in any case in which a United States person is treated as owning stock in a passive foreign investment company by reason of subsection (a)— (i) any disposition by the United States person or the person owning such stock which results in the United States person being treated as no longer owning such stock, or (ii) any distribution of property in respect of such stock to the person holding such stock, shall be treated as a disposition by, or distribution to, the United States person with respect to the stock in the passive foreign investment company. (B) Amount treated in same manner as previously taxed income Rules similar to the rules of section 959(b) shall apply to any amount described in subparagraph (A) and to any amount included in gross income under section 1293(a) (or which would have been so included but for section 951(c)) in respect of stock which the taxpayer is treated as owning under subsection (a).

(6) Dispositions Except as provided in regulations, if a taxpayer uses any stock in a passive foreign investment company as security for a loan, the taxpayer shall be treated as having disposed of such stock.

(7) Treatment of certain foreign corporations owning stock in 25-percent owned domestic corporation (A) In general If— (i) a foreign corporation is subject to the tax imposed by section 531 (or waives any benefit under any treaty which would otherwise prevent the imposition of such tax), and (ii) such foreign corporation owns at least 25 percent (by value) of the stock of a domestic corporation, for purposes of determining whether such foreign corporation is a passive foreign investment company, any qualified stock held by such domestic corporation shall be treated as an asset which does not produce passive income (and is not held for the production of passive income) and any amount included in gross income with respect to such stock shall not be treated as passive income. (B) Qualified stock For purposes of subparagraph (A), the term “qualified stock” means any stock in a C corporation which is a domestic corporation and which is not a regulated investment company or real estate investment trust.

(8) Treatment of certain subpart F inclusions Any amount included in gross income under section 951(a)(1)(B) shall be treated as a distribution received with respect to the stock.

# (c) Treatment of stock held by pooled income fund

If stock in a passive foreign investment company is owned (or treated as owned under subsection (a)) by a pooled income fund (as defined in section 642(c)(5)) and no portion of any gain from a disposition of such stock may be allocated to income under the terms of the governing instrument of such fund— (1) section 1291 shall not apply to any gain on a disposition of such stock by such fund if (without regard to section 1291) a deduction would be allowable with respect to such gain under section 642(c)(3), (2) section 1293 shall not apply with respect to such stock, and (3) in determining whether section 1291 applies to any distribution in respect of such stock, subsection (d) of section 1291 shall not apply.

# (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 lease with a term of at least 12 months shall be treated as an asset actually held by such corporation. (2) Amount taken into account (A) In general The amount taken into account under section 1297(a)(2) with respect to 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.

# (e) Special rules for certain intangibles

For purposes of this part— (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 367(d)(4)) 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 provisions of this part. (3) Controlled foreign corporation For purposes of this subsection, the term “controlled foreign corporation” has the meaning given such term by section 957(a).

# (f) Reporting requirement

Except as otherwise provided by the Secretary, each United States person who is a shareholder of a passive foreign investment company shall file an annual report containing such information as the Secretary may require.

# (g) Regulations

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part.