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May 19, 2015

By: Brian J. Senie

On April 24, 2015, the Internal Revenue Service (the “IRS”) issued proposed regulations (Prop. Reg. §1.1297-4) addressing when a foreign insurance company’s income is excluded from the definition of passive income under the passive foreign investment company (“PFIC”) rules of Internal Revenue Code Section 1297.  Section 1297 defines a foreign corporation as a PFIC if 75 percent or more of its gross income for the taxable year is passive income, or 50 percent or more of its assets produce passive income or are held for the production of passive income.  PFICs owned by U.S. investors are subject to very unfavorable tax treatment as a general matter.

This Stroock Special Bulletin provides an overview of the proposed regulations, which target a perceived abuse in which hedge funds and other entities would rely on reinsurance affiliates to enable them to fall within the “active conduct of an insurance business” exception to passive income and thereby shelter their investment earnings from tax under the PFIC rules.