Less sum of:

(6) Net increase in reserves under sec. 809(d) (2) (paragraph (a)(7))...

(7) Deductions allowed under sec. 809(d) (8), (9), and (12) which relate to gross investment income (paragraph (a) (4)), unallocable but as apportioned under paragraph (b) (5)

(8) Deductions allowed under sec. 809 (d) (other than deduction allowed under sec. 809(d) (2) and other than those deductions allowed under sec. 809 (d) (8), (9), and (12) which relate to gross investment income) (paragraph (a) (8)):

(i) allocable.

(ii) unallocable, but as apportioned under paragraph (c) (4) ....

Gain from operations...

[T.D. 6781, 29 F.R. 18207, Dec. 23, 1964]

1.953-5 Corporations not qualifying as insurance companies.

(a) In general. A controlled foreign corporation is not excluded from the application of paragraph (a) of § 1.953-1 because such corporation, if it were a domestic corporation, would not be taxable as an insurance company to which subchapter L of the Code applies. Thus, if a controlled foreign corporation reinsures or issues insurance or annuity contracts in connection with United States risks, as defined in § 1.953-2 or §1.953-3, and satisfies the 5-percent minimum premium requirement prescribed in paragraph (b) of § 1.953-1, such corporation may derive income from the insurance of United States risks even though the primary and predominant business activity of such corporation during the taxable year is not the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies.

(b) Income from insurance of United States risks by noninsurance company. For purposes of paragraph (a) of § 1.953-1, the taxable income derived from the reinsuring or the issuing of any insurance or annuity contract in connection with United States risks by a

controlled foreign corporation which, if it were a domestic corporation, would not be taxable as an insurance company to which subchapter L of the Code applies shall be determined under § 1.953-4, subject to, and to the extent not inconsistent with, the special rules prescribed in paragraph (c) or (d) of this section, whichever applies.

(c) Special rules in determining taxable income-(1) In general. The rules prescribed in this paragraph apply in order to exclude from the determination under § 1.953-4 of the taxable income described in paragraph (b) of this section those items of the controlled foreign corporation's gross income and deductions which are not attributable to the reinsuring and issuing of insurance and annuity contracts.

(2) Life insurance taxable income(i) Amount of investment yield taken into account. For purposes of determining the taxable income of a controlled foreign corporation which would not be taxable as an insurance company to which subchapter L of the Code applies if it were a domestic corporation but would be taxable as an insurance company to which part I of such subchapter applies if it were a domestic insurance company engaged in the business of only

reinsuring or issuing the insurance or annuity contracts which have been reinsured or issued by such corporation, the investment yield under section 804 (c), the amount (if any) by which the net long-term capital gain exceeds the net short-term capital loss, and all items of income taken into account under section 809 (c) (3) shall be taken into account, subject to the provisions of paragraphs (e) and (f) of § 1.953-4, in an amount which bears the same ratio to each of such amounts of investment yield, excess gain, and income items, as the case may be, as the numerator determined under subdivision (ii) of this subparagraph bears to the denominator determined under subdivision (iii) of this subparagraph.

(ii) Numerator. The numerator used for purposes of the apportionment under subdivision (1) of this subparagraph shall be the sum of

(a) The mean of each of the items described in section 810(c) at the beginning and end of the taxable year, determined in accordance with the rules prescribed in paragraph (c) of § 1.953-4 for purposes of determining taxable income of a controlled foreign corporation under paragraph (a) of § 1.953-4,

(b) The mean of other liabilities at the beginning and end of the taxable year which are attributable to the reinsuring and issuing of insurance and annuity contracts, and

(c) The mean of the earnings and profits accumulated by the controlled foreign corporation at the beginning and end of the taxable year (determined without diminution by reason of any distributions made during the taxable year) which are attributable to the reinsuring and issuing of insurance and annuity contracts.

(iii) Denominator. The denominator used for purposes of the apportionment under subdivision (i) of this subparagraph shall be the mean of the value of the total assets held by the controlled foreign corporation at the beginning and end of the taxable year, determined by taking assets into account at their actual value (not reduced by liabilities), which, in the absence of affirmative evidence to the contrary, shall be deemed to be (a) face value in the case of bills receivable, accounts receivable, notes receivable, and open accounts held by a controlled foreign corporation using the cash receipts and disbursements method of accounting

and (b) adjusted basis in the case of all other assets.

(3) Mutual and other insurance taxable income-(1) Amount of insurance income taken into account. For purposes of determining the taxable income of a controlled foreign corporation which, if it were a domestic corporation, would not be taxable as an insurance company to which subchapter L of the Code applies but which if it were a domestic insurance company engaged in the business of only reinsuring or issuing the insurance or annuity contracts which have been reinsured or issued by such corporation, would be taxable as a mutual insurance company to which part II of subchapter L of the Code applies, or would be taxable as a mutual marine insurance or other insurance company to which part III of subchapter L of the Code applies, the sum of the items of gross income referred to in section 832(b) (1) (except the gross amount earned during the taxable year from underwriting income described in section 832 (b) (1) (A)) reduced by the deductions allowable under section 832 (c) which are related to such items of gross income shall be taken into account, subject to the provisions of paragraphs (e) and (f) of § 1.953-4, in an amount which bears the same proportion to the sum of such items of gross income reduced by such deductions as the numerator determined under subdivision (ii) of this subparagraph bears to the denominator determined under subdivision (iii) of this subparagraph.

(ii) Numerator. The numerator used for purposes of the apportionment under subdivision (1) of this subparagraph shall be the sum of

(a) The mean of the controlled foreign corporation's unearned premiums at the beginning and end of the taxable year, determined under section 832(b) (4) (B) and in accordance with the rules prescribed in paragraph (c) of § 1.953-4 for purposes of determining taxable income of a controlled foreign corporation under paragraph (a) of § 1.953-4,

(b) The mean of such corporation's unpaid losses at the beginning and end of the taxable year, determined under section 832(b) (5) (B),

(c) The mean of the items described in section 810(c) (4) at the beginning and end of the taxable year, to the extent allowable to such corporation under section 832(c) (11),

(d) The mean of other liabilities at the beginning and end of the taxable year which are attributable to the reinsuring and issuing of insurance and annuity contracts, and

(e) The mean of the earnings and profits accumulated by such corporation at the beginning and end of the taxable year (determined without diminution by reason of any distributions made during the taxable year) which are attributable to the reinsuring and issuing of insurance and annuity contracts.

(iii) Denominator. The denominator used for purposes of the apportionment under subdivision (1) of this subparagraph shall be the mean of the value of the total assets held by the controlled foreign corporation at the beginning and end of the taxable year, determined in the manner prescribed in subparagraph (2) (iii) of this paragraph.

(d) Separate accounting. The special rules prescribed in paragraph (c) of this section shall not apply if the district director determines that the controlled foreign corporation, in good faith and unaffected by considerations of tax liability, regularly employs in its books of account a detailed segregation of receipts, expenditures, assets, liabilities, and net worth which clearly reflects the income derived from the reinsuring or issuing of insurance or annuity contracts. The district director, in making such determination, shall give effect to any foreign law, satisfactory evidence of which is presented by the United States shareholder to the district director, which requires a reasonable segregation of the insurance assets of the controlled foreign corporation.

[T.D. 6781, 29 F.R. 18211, Dec. 23, 1964] § 1.953-6

Relationship of sections 953

and 954.

(a) Priority of application. For purposes of determining the subpart F income of a controlled foreign corporation under section 952 for any taxable year, the provisions of section 954, relating to foreign base company income, shall be applied, after first applying section 953, only with respect to income which is not income derived from the insurance of United States risks under section 953. For example, the provisions of section 954 may be applied with respect to the income of a controlled foreign corporation which is not income derived from the insurance of United States risks un

der section 953 because such corporation does not satisfy the 5-percent minimum premium requirement prescribed in paragraph (b) of § 1.953-1, even though such corporation has taxable income, as determined under § 1.953-4, which is attributable to the reinsuring or the issuing of any insurance or annuity contracts in connection with United States risks. In addition, the provisions of section 954 may apply with respect to the income of a controlled foreign corporation to the extent such income is not allocated or apportioned under § 1.953-4 to the insurance of United States risks.

(b) Decrease in income not material. It is not material that the income of a controlled foreign corporation is decreased as a result of the application of paragraph (a) of this section. Thus, in applying § 1.953-4 to the income of a controlled foreign corporation described in paragraph (c) (2) of § 1.953-5 which would, but for paragraph (a) of this section, be subject to the provisions of section 954, there shall be allowed, in determining the taxable income derived from the insurance of United States risks under § 1.953-4, a deduction under section 809 (a) (1) for the share of each and every item of investment yield set aside for policyholders; it is not material that in determining foreign base company income such deduction would not be allowed under section 954 (b) (5). Further, income of a controlled foreign corporation which is required to be taken into account under section 953 in determining income derived from the insurance of United States risks and would, but for the provisions of paragraph (a) of this section, constitute foreign base company income under section 954 shall not be taken into account under section 954 (b) (3) (B) in determining whether foreign base company income exceeds 70 percent of gross income for the taxable year.

(c) Increase in income not material. It is not material that the income of a controlled foreign corporation is increased as a result of the application of paragraph (a) of this section. Thus, in applying § 1.953-4 to income of a controlled foreign corporation which would, but for paragraph (a) of this section, be subject to the provisions of section 954, it is not material that the dividends, interest, and gains from the sale or exchange of stock or securities derived

from certain investments which would not be included in foreign personal holding company income under section 954 (c) (3) (B) are included under section 953 in income derived from the insurance of United States risks. Further, income of a controlled foreign corporation which is required to be taken into account under section 953 in determining income derived from the insurance of United States risks and would, but for paragraph (a) of this section, constitute foreign base company income shall not be excluded under section 954(b) (3) (A) for the taxable year.

[T.D. 6781, 29 F.R. 18212, Dec. 23, 1964]

§ 1.954 Statutory provisions; foreign base company income.

SEC. 954. Foreign base company income(a) Foreign base company income. For purposes of section 952 (a) (2), the term "foreign base company income" means for any taxable year the sum of

(1) The foreign personal holding company income for the taxable year (determined under subsection (c) and reduced as provided in subsection (b)(5)),

(2) The foreign base company sales income for the taxable year (determined under subsection (d) and reduced as provided in subsection (b)(5)), and

(3) The foreign base company services income for the taxable year (determined under subsection (e) and reduced as provided in subsection (b)(5)).

(b) Exclusions and special rules—(1) Exclusion of certain dividends, interest, and gains from qualified investments in less developed countries. For purposes of subsection (a), foreign base company income does not include

(A) Dividends and interest received during the taxable year from investments which at the time of receipt are qualified investments in less developed countries (as defined in section 955 (b)), or

(B) If the gains from the sale or exchange during the taxable year of investments which at the time of sale or exchange are qualified investments in less developed countries exceed the losses from the sale or exchange during the taxable year of such qualified investments, the amount by which such gains exceed such losses.

The preceding sentence shall apply only to the extent that the sum of the dividends and interest described in subparagraph (A) and the amount described in subparagraph (B) does not exceed the increase for the taxable year in qualified investments in less developed countries of the controlled foreign corporation (as determined under subsection (f)).

(2) Exclusion of certain shipping income. For purposes of subsection (a), foreign base company income does not include income

derived from, or in connection with, the use (or hiring or leasing for use) of any aircraft or vessel in foreign commerce, or the performance of services directly related to the use of any such aircraft or vessel.

(3) Special rule where foreign base company income is less than 30 percent or more than 70 percent of gross income. For purposes of subsection (a)

(A) If the foreign base company income (determined without regard to paragraphs (1) and (5)) is less than 30 percent of gross income, no part of the gross income of the taxable year shall be treated as foreign base company income.

(B) If the foreign base company income (determined without regard to paragraphs (1) and (5)) exceeds 70 percent of gross income, the entire gross income of the taxable year shall, subject to the provisions of paragraphs (1), (2), (4), and (5), be treated as foreign base company income.

(4) Exception for foreign corporations not availed of to reduce taxes. For purposes of subsection (a), foreign base company income does not include any item of income received by a controlled foreign corporation if it is established to the satisfaction of the Secretary or his delegate with respect to such item that the creation or organization of the controlled foreign corporation receiving such item under the laws of the foreign country in which it is incorporated does not have the effect of substantial reduction of income, war profits, or excess profits taxes or similar taxes.

(5) Deductions to be taken into account. For purposes of subsection (a), the foreign personal holding company income, the foreign base company sales income, and the foreign base company services income shall be reduced, under regulations prescribed by the Secretary or his delegate, so as to take into account deductions (including taxes) properly allocable to such income.

(c) Foreign personal holding company income-(1) In general. For purposes of subsection (a) (1), the term "foreign personal holding company income" means the foreign personal holding company income (as defined in section 553), modified and adjusted as provided in paragraphs (2), (3), and (4).

(2) Rents included without regard to 50 percent limitation. For purposes of paragraph (1), all rents shall be included in foreign personal holding company income without regard to whether or not such rents constitute 50 percent or more of gross

income.

(3) Certain income derived in active conduct of trade or business. For purposes of paragraph (1), foreign personal holding company income does not include

(A) Rents and royalties which are derived in the active conduct of a trade or business and which are received from a person other than a related person (within the meaning of subsection (d) (3)), or

(B) Dividends, interest, and gains from the sale or exchange of stock or securities

derived in the conduct of a banking, financing, or similar business, or derived from the investments made by an insurance company of its unearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business, and which are received from a person other than a related person (within the meaning of subsection (d) (3)).

(4) Certain income received from related persons. For purposes of paragraph (1), foreign personal holding company income does not include

(A) Dividends and interest received from a related person which (i) is created or organized under the laws of the same foreign country under the laws of which the controlled foreign corporation is created or organized, and (ii) has a substantial part of its assets used in its trade or business located in such same foreign country;

(B) Interest received in the conduct of a banking, financing, or similar business from a related person engaged in the conduct of a banking, financing, or similar business if the businesses of the recipient and the payor are predominantly with persons other than related persons; and

(C) Rents, royalties, and similar amounts received from a related person for the use of, or the privilege of using, property within the country under the laws of which the controlled foreign corporation is created or organized.

(d) Foreign base company sales income(1) In general. For purposes of subsection (a) (2), the term "foreign base company sales income" means income (whether in the form of profits, commissions, fees, or otherwise) derived in connection with the purchase of personal property from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the purchase of personal property from any person and its sale to a related person, or the purchase of personal property from any person on behalf of a related person where

(A) The property which is purchased (or in the case of property sold on behalf of a related person, the property which is sold) is manufactured, produced, grown, or extracted outside the country under the laws of which the controlled foreign corporation is created or organized, and

(B) The property is sold for use, consumption, or disposition outside such foreign country, or, in the case of property purchased on behalf of a related person, is purchased for use, consumption, or disposition outside such foreign country.

(2) Certain branch income. For purposes of determining foreign base company sales income in situations in which the carrying on of activities by a controlled foreign corporation through a branch or similar establishment outside the country of incorporation of the controlled foreign corporation has substantially the same effect as if such branch or similar establishment were

66-052-67--13

a

wholly owned subsidiary corporation deriving such income, under regulations prescribed by the Secretary or his delegate the income attributable to the carrying on of such activities of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation and shall constitute foreign base company sales income of the controlled foreign corporation.

(3) Related person defined. For purposes of this section, a person is a related person with respect to a controlled foreign corporation, if—

(A) Such person is an individual, partnership, trust, or estate which controls the controlled foreign corporation;

(B) Such person is a corporation which controls, or is controlled by, the controlled foreign corporation; or

(C) Such person is a corporation which is controlled by the same person or persons which control the controlled foreign corporation.

For purposes of the preceding sentence, control means the ownership, directly or indirectly, of stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote. purposes of this paragraph, the rules for determining ownership of stock prescribed by section 958 shall apply.

For

(e) Foreign base company services income. For purposes of subsection (a)(3), the term "foreign base company services income" means income (whether in the form of compensation, commissions, fees, or otherwise) derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services which

(1) Are performed for or on behalf of any related person (within the meaning of subsection (d) (3)), and

(2) Are performed outside the country under the laws of which the controlled foreign corporation is created or organized.

The preceding sentence shall not apply to income derived in connection with the performance of services which are directly related to the sale or exchange by the controlled foreign corporation of property manufactured, produced, grown, or extracted by it and which are performed prior to the time of the sale or exchange, or of services directly related to an offer or effort to sell or exchange such property.

(f) Increase in qualified investments in less developed countries. For purposes of subsection (b) (1), the increase for any taxable year in qualified investments in less developed countries of any controlled foreign corporation is the amount by which

(1) The qualified investments in less developed countries (as defined in section 955 (b)) of the controlled foreign corporation at the close of the taxable year, exceeds

(2) The qualified investments in less developed countries (as so defined) of the con