The US Treasury and the IRS recently released Final Regulations (which finalize with modifications the 2019 Proposed Regulations published on July 11, 2019) under Sections 1291, 1297, and 1298, and Proposed Regulations under Sections 250, 951A, 1291, 1297, and 1298. The Final Regulations retain the basic approach and structure of the 2019 Proposed Regulations. The New Proposed Regulations provide additional guidance with respect to certain definitional and mechanical issues under the passive foreign investment company (PFIC) rules, including the application of the Section 1297(b)(2)(A) active banking exception. This Insight covers the key provisions of the Final Regulations and the Proposed Regulations.
The PFIC rules, which were modified by the 2017 tax reform legislation (the 2017 act) (enacted on December 22, 2017), generally aim to remove the economic benefit of deferral that otherwise may be available to US investors in foreign investment funds. Broadly, the Final Regulations and the Proposed Regulations address the attribution of PFIC stock to US investors, the determination of a foreign corporation’s PFIC status, and the application of the PFIC insurance and banking exceptions.
The Final Regulations generally apply to tax years of shareholders beginning on or after the date the regulations are filed with the Federal Register. The Proposed Regulations generally are effective for tax years of shareholders beginning on or after the date of the filing of those rules as final in the Federal Register.