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On December 4, 2020, the Treasury Department released final regulations ( TD 9936; Final Regulations) and proposed regulations (REG-111950-20; Proposed Regulations) under the passive foreign investment company (PFIC) rules. The Final Regulations generally follow proposed regulations published on July 10, 2019, but make certain changes. The Final Regulations generally apply to tax years beginning on or after the date that the regulations are filed with the Federal Register (e.g., 2021 for calendar-year taxpayers).

The most significant changes made by the Final Regulations include:

• Declining to apply the IRC Section 954(h) active financing income rules for PFIC testing purposes (thereby reversing the favorable treatment of IRC Section 954(h) under the 2019 proposed regulations)
• Modifying application of the IRC Section 1297(b)(2)(B) exception for insurance companies, including the application of the 25% applicable insurance liabilities test, the 10% exception for runoff and ratings-related circumstances, the exception for qualifying domestic insurance corporations, and the treatment of the income and assets of look-through subsidiaries and look-through partnerships of qualifying domestic insurance corporations
• Extending for the purposes of the look-through rules under IRC Section 1297(c):
• The elimination rule for debt receivables and interest to also include certain intercompany rents and royalties
• The activity-attribution rule to also attribute activities among members of an affiliated group rather than merely parents and subsidiaries
• Modifying application of the look-through rule for domestic subsidiaries under IRC Section 1298(b)(7), including:
• Eliminating the provision in the 2019 proposed regulations that would have excluded IRC Section 1298(b)(7) for purposes of determining whether a foreign corporation is a PFIC when applying the PFIC ownership attribution rules in IRC Section 1298(a)(2)
• Eliminating the qualified stock anti-abuse rule in the 2019 proposed regulations but retaining the principal-purpose anti-abuse rule and extending it to apply to certain capitalizations of a second-tier domestic subsidiary

Notable provisions of the Proposed Regulations would:

• Confirm that the only available exception from PFIC status for financial institutions is the IRC Section 1297(b)(2)(A) active bank rules, but propose certain principles of IRC Section 954(h) for purposes of IRC Section 1297(b)(2)(A) while allowing taxpayers to continue to rely on previous guidance under IRC Section 1297(b)(2)(A)
• Significantly modify the application of the IRC Section 1297(b)(2)(B) exception for insurance companies, including the active-conduct requirements, the application of the 25% applicable insurance liabilities test and the exception for qualifying domestic insurance corporations
• Introduce a limited "working capital" exception to treat cash deposited in a non-interest-bearing account held for the present needs of an active trade or business (no greater than the amount of cash expected to cover 90 days of operating expenses) as a non-passive asset
• Include two safe harbors that would preclude the application of the principal-purpose anti-abuse rule for purposes of IRC Section 1298(b)(7)

A detailed Tax Alert is forthcoming.