```

[House Report 114-307]
[From the U.S. Government Publishing Office]

114th Congress }                                           {  Report
                        HOUSE OF REPRESENTATIVES
 1st Session   }                                           {  114-307

======================================================================

 
            PERMANENT ACTIVE FINANCING EXCEPTION ACT OF 2015

                                _______
                                

October 23, 2015.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Ryan of Wisconsin, from the Committee on Ways and Means, submitted 
                             the following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 961]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 961) to amend the Internal Revenue Code of 1986 to 
permanently extend the subpart F exemption for active financing 
income, having considered the same, report favorably thereon 
with an amendment and recommend that the bill as amended do 
pass.

                                CONTENTS

                                                                   Page
  I. SUMMARY AND BACKGROUND...........................................2
          A. Purpose and Summary.................................     2
          B. Background and Need for Legislation.................     2
          C. Legislative History.................................     2
 II. EXPLANATION OF THE BILL..........................................3
          A. Exceptions for Active Financing Income (Secs. 953 
              and 954 of the Code)...............................     3
III. VOTES OF THE COMMITTEE...........................................5
 IV. BUDGET EFFECTS OF THE BILL.......................................6
          A. Committee Estimate of Budgetary Effects.............     6
          B. Statement Regarding New Budget Authority and Tax 
              Expenditures Budget Authority......................     8
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................     8
  V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.......9
          A. Committee Oversight Findings and Recommendations....     9
          B. Statement of General Performance Goals and 
              Objectives.........................................     9
          C. Information Relating to Unfunded Mandates...........     9
          D. Applicability of House Rule XXI 5(b)................     9
          E. Tax Complexity Analysis.............................    10
          F. Congressional Earmarks, Limited Tax Benefits, and 
              Limited Tariff Benefits............................    10
          G. Duplication of Federal Programs.....................    10
          H. Disclosure of Directed Rule Makings.................    10
 VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........11
          A. Text of Existing Law Amended or Repealed by the 
              Bill, as Reported..................................    11
          B. Changes in Existing Law Proposed by the Bill, as 
              Reported...........................................    34
VII. DISSENTING VIEWS................................................58

    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Permanent Active Financing Exception 
Act of 2015''.

SEC. 2. PERMANENT SUBPART F EXEMPTION FOR ACTIVE FINANCING INCOME.

  (a) Banking, Financing, or Similar Businesses.--Section 954(h) of the 
Internal Revenue Code of 1986 (relating to special rule for income 
derived in the active conduct of banking, financing, or similar 
businesses) is amended by striking paragraph (9).
  (b) Insurance Businesses.--Section 953(e) of such Code (relating to 
exempt insurance income) is amended by striking paragraph (10) and by 
redesignating paragraph (11) as paragraph (10).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years of a foreign corporation beginning after December 31, 
2014, and to taxable years of United States shareholders with or within 
which such taxable years of such foreign corporation end.

                       I. SUMMARY AND BACKGROUND

                         A. Purpose and Summary

    H.R. 961, reported by the Committee on Ways and Means, 
provides a permanent exception from subpart F for active 
financing income. Under current law, that exception expired for 
taxable years beginning after December 31, 2014.

                 B. Background and Need for Legislation

    While the Committee continues actively to pursue 
comprehensive tax reform as a critical means of promoting 
economic growth and job creation, the Committee also believes 
that it is important to provide permanent, immediate tax relief 
to worldwide American companies to help encourage economic 
growth and job creation here in the United States. By providing 
deferral of U.S. tax on their active financing income, H.R. 961 
would deliver certainty and stability to these companies, 
allowing U.S. businesses to compete against foreign 
multinational corporations that are not subject to an onerous 
worldwide tax system.

                         C. Legislative History

Background

    H.R. 961 was introduced on February 12, 2015, and was 
referred to the Committee on Ways and Means.

Committee action

    The Committee on Ways and Means marked up H.R. 961, the 
``Permanent Active Financing Exception Act of 2015,'' on 
September 17, 2015, and ordered the bill, as amended, favorably 
reported (with a quorum being present).

Committee hearings

    The need for a permanent extension of the active financing 
exception was discussed at no fewer than six hearings during 
the 112th, 113th and 114th Congresses:
           Full Committee hearing on Fundamental Tax 
        Reform (January 20, 2011);
           Full Committee hearing on the Need for 
        Comprehensive Tax Reform to Help American Companies 
        Compete in the Global Market and Create Jobs for 
        American Workers (May 12, 2011);
           Select Revenue Measures Subcommittee hearing 
        on Ways and Means International Tax Reform Discussion 
        Draft (November 17, 2011);
           Full Committee hearing on Tax Havens, Base 
        Erosion and Profit-Shifting (June 13, 2013);
           Full Committee hearing on the Benefits of 
        Permanent Tax Policy for America's Job Creators (April 
        8, 2014); and
           Select Revenue Measures Subcommittee Hearing 
        on Repatriation of Foreign Earnings as a Source of 
        Funding for the Highway Trust Fund (June 24, 2015).

                      II. EXPLANATION OF THE BILL

  A. Exceptions for Active Financing Income (secs. 953 and 954 of the 
                                 Code)

                              PRESENT LAW

    Under the subpart F rules,\1\ 10-percent-or-greater U.S. 
shareholders of a controlled foreign corporation (``CFC'') are 
subject to U.S. tax currently on certain income earned by the 
CFC, whether or not such income is distributed to the 
shareholders. The income subject to current inclusion under the 
subpart F rules includes, among other things, insurance income 
and foreign base company income. Foreign base company income 
includes, among other things, foreign personal holding company 
income and foreign base company services income (i.e., income 
derived from services performed for or on behalf of a related 
person outside the country in which the CFC is organized).
---------------------------------------------------------------------------
    \1\Secs. 951-964.
---------------------------------------------------------------------------
    Foreign personal holding company income generally consists 
of the following: (1) dividends, interest, royalties, rents, 
and annuities; (2) net gains from the sale or exchange of (a) 
property that gives rise to the preceding types of income, (b) 
property that does not give rise to income, and (c) interests 
in trusts, partnerships, and real estate mortgage investment 
conduits (``REMICs''); (3) net gains from commodities 
transactions; (4) net gains from certain foreign currency 
transactions; (5) income that is equivalent to interest; (6) 
income from notional principal contracts; (7) payments in lieu 
of dividends; and (8) amounts received under personal service 
contracts.
    Insurance income subject to current inclusion under the 
subpart F rules includes any income of a CFC attributable to 
the issuing or reinsuring of any insurance or annuity contract 
in connection with risks located in a country other than the 
CFC's country of organization. Subpart F insurance income also 
includes income attributable to an insurance contract in 
connection with risks located within the CFC's country of 
organization, as the result of an arrangement under which 
another corporation receives a substantially equal amount of 
consideration for insurance of other country risks. Investment 
income of a CFC that is allocable to any insurance or annuity 
contract related to risks located outside the CFC's country of 
organization is taxable as subpart F insurance income.\2\
---------------------------------------------------------------------------
    \2\Prop. Treas. Reg. sec. 1.953-1(a).
---------------------------------------------------------------------------
    Temporary exceptions from foreign personal holding company 
income, foreign base company services income, and insurance 
income apply for subpart F purposes for certain income that is 
derived in the active conduct of a banking, financing, or 
similar business, as a securities dealer, or in the conduct of 
an insurance business (so-called ``active financing income'').
    With respect to income derived in the active conduct of a 
banking, financing, or similar business, a CFC is required to 
be predominantly engaged in such business and to conduct 
substantial activity with respect to such business in order to 
qualify for the active financing exceptions. In addition, 
certain nexus requirements apply, which provide that income 
derived by a CFC or a qualified business unit (``QBU'') of a 
CFC from transactions with customers is eligible for the 
exceptions if, among other things, substantially all of the 
activities in connection with such transactions are conducted 
directly by the CFC or QBU in its home country, and such income 
is treated as earned by the CFC or QBU in its home country for 
purposes of such country's tax laws. Moreover, the exceptions 
apply to income derived from certain cross border transactions, 
provided that certain requirements are met. Additional 
exceptions from foreign personal holding company income apply 
for certain income derived by a securities dealer within the 
meaning of section 475 and for gain from the sale of active 
financing assets.
    In the case of a securities dealer, the temporary exception 
from foreign personal holding company income applies to certain 
income. The income covered by the exception is any interest or 
dividend (or certain equivalent amounts) from any transaction, 
including a hedging transaction or a transaction consisting of 
a deposit of collateral or margin, entered into in the ordinary 
course of the dealer's trade or business as a dealer in 
securities within the meaning of section 475. In the case of a 
QBU of the dealer, the income is required to be attributable to 
activities of the QBU in the country of incorporation, or to a 
QBU in the country in which the QBU both maintains its 
principal office and conducts substantial business activity. A 
coordination rule provides that this exception generally takes 
precedence over the exception for income of a banking, 
financing or similar business, in the case of a securities 
dealer.
    In the case of insurance, a temporary exception from 
foreign personal holding company income applies for certain 
income of a qualifying insurance company with respect to risks 
located within the CFC's country of creation or organization. 
In the case of insurance, temporary exceptions from insurance 
income and from foreign personal holding company income also 
apply for certain income of a qualifying branch of a qualifying 
insurance company with respect to risks located within the home 
country of the branch, provided certain requirements are met 
under each of the exceptions. Further, additional temporary 
exceptions from insurance income and from foreign personal 
holding company income apply for certain income of certain CFCs 
or branches with respect to risks located in a country other 
than the United States, provided that the requirements for 
these exceptions are met. In the case of a life insurance or 
annuity contract, reserves for such contracts are determined 
under rules specific to the temporary exceptions. Present law 
also permits a taxpayer in certain circumstances, subject to 
approval by the Internal Revenue Service (``IRS'') through the 
ruling process or in published guidance, to establish that the 
reserve of a life insurance company for life insurance and 
annuity contracts is the amount taken into account in 
determining the foreign statement reserve for the contract 
(reduced by catastrophe, equalization, or deficiency reserve or 
any similar reserve). IRS approval is to be based on whether 
the method, the interest rate, the mortality and morbidity 
assumptions, and any other factors taken into account in 
determining foreign statement reserves (taken together or 
separately) provide an appropriate means of measuring income 
for Federal income tax purposes.
    The temporary exceptions for active financing income expire 
for taxable years of foreign corporations beginning after 
December 31, 2014 (and taxable years of U.S. shareholders 
ending with or within those taxable years).

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to make 
permanent the temporary provisions to provide certainty and to 
facilitate business planning.

                        EXPLANATION OF PROVISION

    The provision makes permanent the temporary exceptions from 
subpart F foreign personal holding company income, foreign base 
company services income, and insurance income for certain 
income that is derived in the active conduct of a banking, 
financing, or similar business, as a securities dealer, or in 
the conduct of an insurance business.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2014, and for taxable 
years of U.S. shareholders with or within which such taxable 
years of such foreign corporations end.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the vote of the Committee on Ways and Means in its 
consideration of H.R. 961, the ``Permanent Active Financing 
Exception Act of 2015,'' on September 17, 2015.
    The Chairman's amendment in the nature of a substitute was 
adopted by a voice vote (with a quorum being present).
    The bill, H.R. 961, was ordered favorably reported as 
amended to the House of Representatives by a roll call vote of 
22 yeas to 11 nays (with a quorum being present). The vote was 
as follows:

----------------------------------------------------------------------------------------------------------------
         Representative              Yea       Nay     Present    Representative       Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Ryan........................        X   ........  ........  Mr. Levin.........  ........        X   ........
Mr. Johnson.....................        X   ........  ........  Mr. Rangel........  ........        X   ........
Mr. Brady.......................        X   ........  ........  Mr. McDermott.....  ........        X   ........
Mr. Nunes.......................        X   ........  ........  Mr. Lewis.........  ........        X   ........
Mr. Tiberi......................        X   ........  ........  Mr. Neal..........  ........        X   ........
Mr. Reichert....................        X   ........  ........  Mr. Becerra.......  ........  ........  ........
Mr. Boustany....................        X   ........  ........  Mr. Doggett.......  ........        X   ........
Mr. Roskam......................        X   ........  ........  Mr. Thompson......  ........  ........  ........
Mr. Price.......................        X   ........  ........  Mr. Larson........  ........  ........  ........
Mr. Buchanan....................        X   ........  ........  Mr. Blumenauer....  ........        X   ........
Mr. Smith (NE)..................        X   ........  ........  Mr. Kind..........  ........        X   ........
Ms. Jenkins.....................        X   ........  ........  Mr. Pascrell......  ........        X   ........
Mr. Paulsen.....................        X   ........  ........  Mr. Crowley.......  ........        X   ........
Mr. Marchant....................  ........  ........  ........  Mr. Davis.........  ........        X   ........
Ms. Black.......................        X   ........  ........  Ms. Sanchez.......  ........  ........  ........
Mr. Reed........................        X   ........  ........
Mr. Young.......................        X   ........  ........
Mr. Kelly.......................        X   ........  ........
Mr. Renacci.....................        X   ........  ........
Mr. Meehan......................  ........  ........  ........
Ms. Noem........................        X   ........  ........
Mr. Holding.....................        X   ........  ........
Mr. Smith (MO)..................        X   ........  ........
Mr. Dold........................        X   ........  ........
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL

               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the bill, H.R. 961, as 
reported.
    The bill, as reported, is estimated to have the following 
effect on Federal budget receipts for fiscal years 2016-2025:

                                                                      Fiscal Years
                                                                  [Millions of Dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
     2016          2017         2018         2019         2020         2021        2022        2023        2024        2025        2016-20      2016-25
--------------------------------------------------------------------------------------------------------------------------------------------------------
     -9,975       -7,050       -7,097       -7,150       -7,247       -7,347       -7,698      -8,036      -8,151      -8,254       -38,519     -78,005
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Pursuant to clause 8 of rule XIII of the Rules of the House 
of Representatives, the following statement is made by the 
Joint Committee on Taxation with respect to the provisions of 
the bill amending the Internal Revenue Code of 1986: The gross 
budgetary effect (before incorporating macroeconomic effects) 
in any fiscal year is less than 0.25 percent of the current 
projected gross domestic product of the United States for that 
fiscal year; therefore, the bill is not ``major legislation'' 
for purposes of requiring that the estimate include the 
budgetary effects of changes in economic output, employment, 
capital stock and other macroeconomic variables.

B. Statement Regarding New Budget Authority and Tax Expenditures Budget 
                               Authority

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
bill involves no new or increased budget authority. The 
Committee further states that the revenue-reducing tax 
provisions involve increased tax expenditures. (See amounts in 
table in Part IV.A., above.)

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring a cost estimate 
prepared by the CBO, the following statement by CBO is 
provided.

                                     U.S. Congress,
                                Congressional Budget Office
                                Washington, DC, September 22, 2015.
Hon. Paul Ryan,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 961, the Permanent 
Active Financing Exception Act of 2015.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Peter 
Huether.
            Sincerely,
                                                        Keith Hall.
    Enclosure.

H.R. 961--Permanent Active Financing Exception Act of 2015

    H.R. 961 would amend the Internal Revenue Code to 
permanently allow the deferral of tax on certain income earned 
in foreign companies when calculating taxable income. Under 
Subpart F rules in the Internal Revenue Code, U.S. shareholders 
that hold 10 percent or more of a controlled foreign 
corporation are subject to U.S. tax annually on certain income 
earned by that corporation, whether or not that income is 
distributed to shareholders. H.R. 961 would make permanent the 
temporary exceptions from Subpart F tax treatment for income 
from active banking, financing, insurance, or similar business 
that generally expired after December 31, 2014.
    The staff of the Joint Committee on Taxation (JCT) 
estimates that enacting H.R. 961 would reduce revenues, thus 
increasing federal budget deficits, by about $78 billion over 
the 2016-2025 period.
    The Statutory Pay-As-You-Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting 
direct spending and revenues. Enacting H.R. 961 would result in 
revenue losses in each year beginning in 2016. The estimated 
increases in the deficit are shown in the following table.
    JCT has determined that the bill contains no 
intergovernmental or private-sector mandates as defined in the 
Unfunded Mandates Reform Act.
    The CBO staff contact for this estimate is Peter Huether. 
The estimate was approved by David Weiner, Assistant Director 
for Tax Analysis.

         CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 961, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON SEPTEMBER 17, 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                   By fiscal year, in millions of dollars
                                                   -----------------------------------------------------------------------------------------------------
                                                     2016    2017    2018    2019    2020    2021    2022    2023    2024    2025   2016-2020  2016-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               NET INCREASE IN THE DEFICIT
 
Statutory Pay-As-You-Go Effects...................   9,975   7,050   7,097   7,150   7,247   7,347   7,698   8,036   8,151   8,254     38,519     78,005
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

          A. Committee Oversight Findings and Recommendations

    With respect to clause 3(c)(1) of rule XIII of the Rules of 
the House of Representatives (relating to oversight findings), 
the Committee advises that it was as a result of the 
Committee's review of the provisions of H.R. 961 that the 
Committee concluded that it is appropriate to report the bill, 
as amended, favorably to the House of Representatives with the 
recommendation that the bill do pass.

        B. Statement of General Performance Goals and Objectives

    With respect to clause 3(c)(4) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that the 
bill contains no measure that authorizes funding, so no 
statement of general performance goals and objectives for which 
any measure authorizes funding is required.

              C. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                D. Applicability of House Rule XXI 5(b)

    Rule XXI 5(b) of the Rules of the House of Representatives 
provides, in part, that ``A bill or joint resolution, 
amendment, or conference report carrying a Federal income tax 
rate increase may not be considered as passed or agreed to 
unless so determined by a vote of not less than three-fifths of 
the Members voting, a quorum being present.'' The Committee has 
carefully reviewed the bill, and states that the bill does not 
involve any Federal income tax rate increases within the 
meaning of the rule.

                       E. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (``IRS Reform Act'') 
requires the staff of the Joint Committee on Taxation (in 
consultation with the Internal Revenue Service and the Treasury 
Department) to provide a tax complexity analysis. The 
complexity analysis is required for all legislation reported by 
the Senate Committee on Finance, the House Committee on Ways 
and Means, or any committee of conference if the legislation 
includes a provision that directly or indirectly amends the 
Internal Revenue Code and has widespread applicability to 
individuals or small businesses.
    Pursuant to clause 3(h)(1) of rule XIII of the Rules of the 
House of Representatives, the staff of the Joint Committee on 
Taxation has determined that a complexity analysis is not 
required under section 4022(b) of the IRS Reform Act because 
the bill contains no provisions that amend the Internal Revenue 
Code and that have ``widespread applicability'' to individuals 
or small businesses, within the meaning of the rule.

  F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff 
                                Benefits

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill, and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                   G. Duplication of Federal Programs

    In compliance with Sec. 3(g)(2) of H. Res. 5 (114th 
Congress), the Committee states that no provision of the bill 
establishes or reauthorizes: (1) a program of the Federal 
Government known to be duplicative of another Federal program, 
(2) a program included in any report from the Government 
Accountability Office to Congress pursuant to section 21 of 
Public Law 111-139, or (3) a program related to a program 
identified in the most recent Catalog of Federal Domestic 
Assistance, published pursuant to the Federal Program 
Information Act (Public Law 95-220, as amended by Public Law 
98-169).

                 H. Disclosure of Directed Rule Makings

    In compliance with Sec. 3(i) of H. Res. 5 (114th Congress), 
the following statement is made concerning directed rule 
makings: The Committee estimates that the bill requires no 
directed rule makings within the meaning of such section.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

  A. Text of Existing Law Amended or Repealed by the Bill, as Reported

  In compliance with clause 3(e)(1)(A) of rule XIII of the 
Rules of the House of Representatives, the text of each section 
proposed to be amended or repealed by the bill, as reported, is 
shown below:

   Text of Existing Law Amended or Repealed by the Bill, as Reported

  In compliance with clause 3(e)(1)(A) of rule XIII of the 
Rules of the House of Representatives, the text of each section 
proposed to be amended or repealed by the bill, as reported, is 
shown below:

                     INTERNAL REVENUE CODE OF 1986

           *       *       *       *       *       *       *
Subtitle A--Income Taxes

           *       *       *       *       *       *       *

CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *

 Subchapter N--Tax Based on Income From Sources Within or Without the 
United States

           *       *       *       *       *       *       *

PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES

           *       *       *       *       *       *       *

Subpart F--Controlled Foreign Corporations

           *       *       *       *       *       *       *

SEC. 953. INSURANCE INCOME.

  (a) Insurance Income.--
          (1) In general.--For purposes of section 952(a)(1), 
        the term ``insurance income'' means any income which--
                  (A) is attributable to the issuing (or 
                reinsuring) of an insurance or annuity 
                contract, and
                  (B) would (subject to the modifications 
                provided by subsection (b)) be taxed under 
                subchapter L of this chapter if such income 
                were the income of a domestic insurance 
                company.
          (2) Exception.--Such term shall not include any 
        exempt insurance income (as defined in subsection (e)).
  (b) Special Rules.--For purposes of subsection (a)--
          (1) The following provisions of subchapter L shall 
        not apply:
                  (A) The small life insurance company 
                deduction.
                  (B) Section 805(a)(5) (relating to operations 
                loss deduction).
                  (C) Section 832(c)(5) (relating to certain 
                capital losses).
          (2) The items referred to in--
                  (A) section 803(a)(1) (relating to gross 
                amount of premiums and other considerations),
                  (B) section 803(a)(2) (relating to net 
                decrease in reserves),
                  (C) section 805(a)(2) (relating to net 
                increase in reserves), and
                  (D) section 832(b)(4) (relating to premiums 
                earned on insurance contracts),
        shall be taken into account only to the extent they are 
        in respect of any reinsurance or the issuing of any 
        insurance or annuity contract described in subsection 
        (a)(1).
          (3) Reserves for any insurance or annuity contract 
        shall be determined in the same manner as under section 
        954(i).
          (4) All items of income, expenses, losses, and 
        deductions shall be properly allocated or apportioned 
        under regulations prescribed by the Secretary.
  (c) Special Rule for Certain Captive Insurance Companies.--
          (1) In general.--For purposes only of taking into 
        account related person insurance income--
                  (A) the term ``United States shareholder'' 
                means, with respect to any foreign corporation, 
                a United States person (as defined in section 
                957(c)) who owns (within the meaning of section 
                958(a)) any stock of the foreign corporation,
                  (B) the term ``controlled foreign 
                corporation'' has the meaning given to such 
                term by section 957(a) determined by 
                substituting ``25 percent or more'' for ``more 
                than 50 percent'', and
                  (C) the pro rata share referred to in section 
                951(a)(1)(A)(i) shall be determined under 
                paragraph (5) of this subsection.
          (2) Related person insurance income.--For purposes of 
        this subsection, the term ``related person insurance 
        income'' means any insurance income (within the meaning 
        of subsection (a)) attributable to a policy of 
        insurance or reinsurance with respect to which the 
        person (directly or indirectly) insured is a United 
        States shareholder in the foreign corporation or a 
        related person to such a shareholder.
          (3) Exceptions.--
                  (A) Corporations not held by insured.--
                Paragraph (1) shall not apply to any foreign 
                corporation if at all times during the taxable 
                year of such foreign corporation--
                          (i) less than 20 percent of the total 
                        combined voting power of all classes of 
                        stock of such corporation entitled to 
                        vote, and
                          (ii) less than 20 percent of the 
                        total value of such corporation,
                is owned (directly or indirectly under the 
                principles of section 883(c)(4)) by persons who 
                are (directly or indirectly) insured under any 
                policy of insurance or reinsurance issued by 
                such corporation or who are related persons to 
                any such person.
                  (B) De minimis exception.--Paragraph (1) 
                shall not apply to any foreign corporation for 
                a taxable year of such corporation if the 
                related person insurance income (determined on 
                a gross basis) of such corporation for such 
                taxable year is less than 20 percent of its 
                insurance income (as so determined) for such 
                taxable year determined without regard to those 
                provisions of subsection (a)(1) which limit 
                insurance income to income from countries other 
                than the country in which the corporation was 
                created or organized.
                  (C) Election to treat income as effectively 
                connected.--Paragraph (1) shall not apply to 
                any foreign corporation for any taxable year 
                if--
                          (i) such corporation elects (at such 
                        time and in such manner as the 
                        Secretary may prescribe)--
                                  (I) to treat its related 
                                person insurance income for 
                                such taxable year as income 
                                effectively connected with the 
                                conduct of a trade or business 
                                in the United States, and
                                  (II) to waive all benefits 
                                (other than with respect to 
                                section 884) with respect to 
                                related person insurance income 
                                granted by the United States 
                                under any treaty between the 
                                United States and any foreign 
                                country, and
                          (ii) such corporation meets such 
                        requirements as the Secretary shall 
                        prescribe to ensure that the tax 
                        imposed by this chapter on such income 
                        is paid.
                An election under this subparagraph made for 
                any taxable year shall not be effective if the 
                corporation (or any predecessor thereof) was a 
                disqualified corporation for the taxable year 
                for which the election was made or for any 
                prior taxable year beginning after 1986.
                  (D) Special rules for subparagraph (C)
                          (i) Period during which election in 
                        effect.--
                                  (I) In general.--Except as 
                                provided in subclause (II), any 
                                election under subparagraph (C) 
                                shall apply to the taxable year 
                                for which made and all 
                                subsequent taxable years unless 
                                revoked with the consent of the 
                                Secretary.
                                  (II) Termination.--If a 
                                foreign corporation which made 
                                an election under subparagraph 
                                (C) for any taxable year is a 
                                disqualified corporation for 
                                any subsequent taxable year, 
                                such election shall not apply 
                                to any taxable year beginning 
                                after such subsequent taxable 
                                year.
                          (ii) Exemption from tax imposed by 
                        section 4371.--The tax imposed by 
                        section 4371 shall not apply with 
                        respect to any related person insurance 
                        income treated as effectively connected 
                        with the conduct of a trade or business 
                        within the United States under 
                        subparagraph (C).
                  (E) Disqualified corporation.--For purposes 
                of this paragraph the term ``disqualified 
                corporation'' means, with respect to any 
                taxable year, any foreign corporation which is 
                a controlled foreign corporation for an 
                uninterrupted period of 30 days or more during 
                such taxable year (determined without regard to 
                this subsection) but only if a United States 
                shareholder (determined without regard to this 
                subsection) owns (within the meaning of section 
                958(a)) stock in such corporation at some time 
                during such taxable year.
          (4) Treatment of mutual insurance companies.--In the 
        case of a mutual insurance company--
                  (A) this subsection shall apply,
                  (B) policyholders of such company shall be 
                treated as shareholders, and
                  (C) appropriate adjustments in the 
                application of this subpart shall be made under 
                regulations prescribed by the Secretary.
          (5) Determination of pro rata share.--
                  (A) In general.--The pro rata share 
                determined under this paragraph for any United 
                States shareholder is the lesser of--
                          (i) the amount which would be 
                        determined under paragraph (2) of 
                        section 951(a) if--
                                  (I) only related person 
                                insurance income were taken 
                                into account,
                                  (II) stock owned (within the 
                                meaning of section 958(a)) by 
                                United States shareholders on 
                                the last day of the taxable 
                                year were the only stock in the 
                                foreign corporation, and
                                  (III) only distributions 
                                received by United States 
                                shareholders were taken into 
                                account under subparagraph (B) 
                                of such paragraph (2), or
                          (ii) the amount which would be 
                        determined under paragraph (2) of 
                        section 951(a) if the entire earnings 
                        and profits of the foreign corporation 
                        for the taxable year were subpart F 
                        income.
                  (B) Coordination with other provisions.--The 
                Secretary shall prescribe regulations providing 
                for such modifications to the provisions of 
                this subpart as may be necessary or appropriate 
                by reason of subparagraph (A).
          (6) Related person.--For purposes of this 
        subsection--
                  (A) In general.--Except as provided in 
                subparagraph (B), the term ``related person'' 
                has the meaning given such term by section 
                954(d)(3).
                  (B) Treatment of certain liability insurance 
                policies.--In the case of any policy of 
                insurance covering liability arising from 
                services performed as a director, officer, or 
                employee of a corporation or as a partner or 
                employee of a partnership, the person 
                performing such services and the entity for 
                which such services are performed shall be 
                treated as related persons.
          (7) Coordination with section 1248.--For purposes of 
        section 1248, if any person is (or would be but for 
        paragraph (3)) treated under paragraph (1) as a United 
        States shareholder with respect to any foreign 
        corporation which would be taxed under subchapter L if 
        it were a domestic corporation and which is (or would 
        be but for paragraph (3)) treated under paragraph (1) 
        as a controlled foreign corporation--
                  (A) such person shall be treated as meeting 
                the stock ownership requirements of section 
                1248(a)(2) with respect to such foreign 
                corporation, and
                  (B) such foreign corporation shall be treated 
                as a controlled foreign corporation.
          (8) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the 
        purposes of this subsection, including--
                  (A) regulations preventing the avoidance of 
                this subsection through cross insurance 
                arrangements or otherwise, and
                  (B) regulations which may provide that a 
                person will not be treated as a United States 
                shareholder under paragraph (1) with respect to 
                any foreign corporation if neither such person 
                (nor any related person to such person) is 
                (directly or indirectly) insured under any 
                policy of insurance or reinsurance issued by 
                such foreign corporation.
  (d) Election by Foreign Insurance Company to be Treated as 
Domestic Corporation.--
          (1) In general.--If--
                  (A) a foreign corporation is a controlled 
                foreign corporation (as defined in section 
                957(a) by substituting ``25 percent or more'' 
                for ``more than 50 percent'' and by using the 
                definition of United States shareholder under 
                953(c)(1)(A)),
                  (B) such foreign corporation would qualify 
                under part I or II of subchapter L for the 
                taxable year if it were a domestic corporation,
                  (C) such foreign corporation meets such 
                requirements as the Secretary shall prescribe 
                to ensure that the taxes imposed by this 
                chapter on such foreign corporation are paid, 
                and
                  (D) such foreign corporation makes an 
                election to have this paragraph apply and 
                waives all benefits to such corporation granted 
                by the United States under any treaty,
        for purposes of this title, such corporation shall be 
        treated as a domestic corporation.
          (2) Period during which election is in effect.--
                  (A) In general.--Except as provided in 
                subparagraph (B), an election under paragraph 
                (1) shall apply to the taxable year for which 
                made and all subsequent taxable years unless 
                revoked with the consent of the Secretary.
                  (B) Termination.--If a corporation which made 
                an election under paragraph (1) for any taxable 
                year fails to meet the requirements of 
                subparagraphs (A), (B), and (C), of paragraph 
                (1) for any subsequent taxable year, such 
                election shall not apply to any taxable year 
                beginning after such subsequent taxable year.
          (3) Treatment of losses.--If any corporation treated 
        as a domestic corporation under this subsection is 
        treated as a member of an affiliated group for purposes 
        of chapter 6 (relating to consolidated returns), any 
        loss of such corporation shall be treated as a dual 
        consolidated loss for purposes of section 1503(d) 
        without regard to paragraph (2)(B) thereof.
          (4) Effect of election.--
                  (A) In general.--For purposes of section 367, 
                any foreign corporation making an election 
                under paragraph (1) shall be treated as 
                transferring (as of the 1st day of the 1st 
                taxable year to which such election applies) 
                all of its assets to a domestic corporation in 
                connection with an exchange to which section 
                354 applies.
                  (B) Exception for pre-1988 earnings and 
                profit.--
                          (i) In general.--Earnings and profits 
                        of the foreign corporation accumulated 
                        in taxable years beginning before 
                        January 1, 1988, shall not be included 
                        in the gross income of the persons 
                        holding stock in such corporation by 
                        reason of subparagraph (A).
                          (ii) Treatment of distributions.--For 
                        purposes of this title, any 
                        distribution made by a corporation to 
                        which an election under paragraph (1) 
                        applies out of earnings and profits 
                        accumulated in taxable years beginning 
                        before January 1, 1988, shall be 
                        treated as a distribution made by a 
                        foreign corporation.
                          (iii) Certain rules to continue to 
                        apply to pre-1988 earnings.--The 
                        provisions specified in clause (iv) 
                        shall be applied without regard to 
                        paragraph (1), except that, in the case 
                        of a corporation to which an election 
                        under paragraph (1) applies, only 
                        earnings and profits accumulated in 
                        taxable years beginning before January 
                        1, 1988, shall be taken into account.
                          (iv) Specified provisions.--The 
                        provisions specified in this clause 
                        are:
                                  (I) Section 1248 (relating to 
                                gain from certain sales or 
                                exchanges of stock in certain 
                                foreign corporations).
                                  (II) Subpart F of part III of 
                                subchapter N to the extent such 
                                subpart relates to earnings 
                                invested in United States 
                                property or amounts referred to 
                                in clause (ii) or (iii) of 
                                section 951(a)(1)(A).
                                  (III) Section 884 to the 
                                extent the foreign corporation 
                                reinvested 1987 earnings and 
                                profits in United States 
                                assets.
          (5) Effect of termination.--For purposes of section 
        367, if--
                  (A) an election is made by a corporation 
                under paragraph (1) for any taxable year, and
                  (B) such election ceases to apply for any 
                subsequent taxable year,
        such corporation shall be treated as a domestic 
        corporation transferring (as of the 1st day of such 
        subsequent taxable year) all of its property to a 
        foreign corporation in connection with an exchange to 
        which section 354 applies.
          (6) Additional tax on corporation making election.--
                  (A) In general.--If a corporation makes an 
                election under paragraph (1), the amount of tax 
                imposed by this chapter for the 1st taxable 
                year to which such election applies shall be 
                increased by the amount determined under 
                subparagraph (B).
                  (B) Amount of tax.--The amount of tax 
                determined under this paragraph shall be equal 
                to the lesser of--
                          (i) 3/4 of 1 percent of the aggregate 
                        amount of capital and accumulated 
                        surplus of the corporation as of 
                        December 31, 1987, or
                          (ii) $1,500,000.
  (e) Exempt Insurance Income.--For purposes of this section--
          (1) Exempt insurance income defined.--
                  (A) In general.--The term ``exempt insurance 
                income'' means income derived by a qualifying 
                insurance company which--
                          (i) is attributable to the issuing 
                        (or reinsuring) of an exempt contract 
                        by such company or a qualifying 
                        insurance company branch of such 
                        company, and
                          (ii) is treated as earned by such 
                        company or branch in its home country 
                        for purposes of such country's tax 
                        laws.
                  (B) Exception for certain arrangements.--Such 
                term shall not include income attributable to 
                the issuing (or reinsuring) of an exempt 
                contract as the result of any arrangement 
                whereby another corporation receives a 
                substantially equal amount of premiums or other 
                consideration in respect of issuing (or 
                reinsuring) a contract which is not an exempt 
                contract.
                  (C) Determinations made separately.--For 
                purposes of this subsection and section 954(i), 
                the exempt insurance income and exempt 
                contracts of a qualifying insurance company or 
                any qualifying insurance company branch of such 
                company shall be determined separately for such 
                company and each such branch by taking into 
                account--
                          (i) in the case of the qualifying 
                        insurance company, only items of 
                        income, deduction, gain, or loss, and 
                        activities of such company not properly 
                        allocable or attributable to any 
                        qualifying insurance company branch of 
                        such company, and
                          (ii) in the case of a qualifying 
                        insurance company branch, only items of 
                        income, deduction, gain, or loss and 
                        activities properly allocable or 
                        attributable to such branch.
          (2) Exempt contract.--
                  (A) In general.--The term ``exempt contract'' 
                means an insurance or annuity contract issued 
                or reinsured by a qualifying insurance company 
                or qualifying insurance company branch in 
                connection with property in, liability arising 
                out of activity in, or the lives or health of 
                residents of, a country other than the United 
                States.
                  (B) Minimum home country income required.--
                          (i) In general.--No contract of a 
                        qualifying insurance company or of a 
                        qualifying insurance company branch 
                        shall be treated as an exempt contract 
                        unless such company or branch derives 
                        more than 30 percent of its net written 
                        premiums from exempt contracts 
                        (determined without regard to this 
                        subparagraph)--
                                  (I) which cover applicable 
                                home country risks, and
                                  (II) with respect to which no 
                                policyholder, insured, 
                                annuitant, or beneficiary is a 
                                related person (as defined in 
                                section 954(d)(3)).
                          (ii) Applicable home country risks.--
                        The term ``applicable home country 
                        risks'' means risks in connection with 
                        property in, liability arising out of 
                        activity in, or the lives or health of 
                        residents of, the home country of the 
                        qualifying insurance company or 
                        qualifying insurance company branch, as 
                        the case may be, issuing or reinsuring 
                        the contract covering the risks.
                  (C) Substantial activity requirements for 
                cross border risks.--A contract issued by a 
                qualifying insurance company or qualifying 
                insurance company branch which covers risks 
                other than applicable home country risks (as 
                defined in subparagraph (B)(ii)) shall not be 
                treated as an exempt contract unless such 
                company or branch, as the case may be--
                          (i) conducts substantial activity 
                        with respect to an insurance business 
                        in its home country, and
                          (ii) performs in its home country 
                        substantially all of the activities 
                        necessary to give rise to the income 
                        generated by such contract.
          (3) Qualifying insurance company.--The term 
        ``qualifying insurance company'' means any controlled 
        foreign corporation which--
                  (A) is subject to regulation as an insurance 
                (or reinsurance) company by its home country, 
                and is licensed, authorized, or regulated by 
                the applicable insurance regulatory body for 
                its home country to sell insurance, 
                reinsurance, or annuity contracts to persons 
                other than related persons (within the meaning 
                of section 954(d)(3)) in such home country,
                  (B) derives more than 50 percent of its 
                aggregate net written premiums from the 
                issuance or reinsurance by such controlled 
                foreign corporation and each of its qualifying 
                insurance company branches of contracts--
                          (i) covering applicable home country 
                        risks (as defined in paragraph (2)) of 
                        such corporation or branch, as the case 
                        may be, and
                          (ii) with respect to which no 
                        policyholder, insured, annuitant, or 
                        beneficiary is a related person (as 
                        defined in section 954(d)(3)),
                except that in the case of a branch, such 
                premiums shall only be taken into account to 
                the extent such premiums are treated as earned 
                by such branch in its home country for purposes 
                of such country's tax laws, and
                  (C) is engaged in the insurance business and 
                would be subject to tax under subchapter L if 
                it were a domestic corporation.
          (4) Qualifying insurance company branch.--The term 
        ``qualifying insurance company branch'' means a 
        qualified business unit (within the meaning of section 
        989(a)) of a controlled foreign corporation if--
                  (A) such unit is licensed, authorized, or 
                regulated by the applicable insurance 
                regulatory body for its home country to sell 
                insurance, reinsurance, or annuity contracts to 
                persons other than related persons (within the 
                meaning of section 954(d)(3)) in such home 
                country, and
                  (B) such controlled foreign corporation is a 
                qualifying insurance company, determined under 
                paragraph (3) as if such unit were a qualifying 
                insurance company branch.
          (5) Life insurance or annuity contract.--For purposes 
        of this section and section 954, the determination of 
        whether a contract issued by a controlled foreign 
        corporation or a qualified business unit (within the 
        meaning of section 989(a)) is a life insurance contract 
        or an annuity contract shall be made without regard to 
        sections 72(s), 101(f), 817(h), and 7702 if--
                  (A) such contract is regulated as a life 
                insurance or annuity contract by the 
                corporation's or unit's home country, and
                  (B) no policyholder, insured, annuitant, or 
                beneficiary with respect to the contract is a 
                United States person.
          (6) Home country.--For purposes of this subsection, 
        except as provided in regulations--
                  (A) Controlled foreign corporation.--The term 
                ``home country'' means, with respect to a 
                controlled foreign corporation, the country in 
                which such corporation is created or organized.
                  (B) Qualified business unit.--The term ``home 
                country'' means, with respect to a qualified 
                business unit (as defined in section 989(a)), 
                the country in which the principal office of 
                such unit is located and in which such unit is 
                licensed, authorized, or regulated by the 
                applicable insurance regulatory body to sell 
                insurance, reinsurance, or annuity contracts to 
                persons other than related persons (as defined 
                in section 954(d)(3)) in such country.
          (7) Anti-abuse rules.--For purposes of applying this 
        subsection and section 954(i)--
                  (A) the rules of section 954(h)(7) (other 
                than subparagraph (B) thereof) shall apply,
                  (B) there shall be disregarded any item of 
                income, gain, loss, or deduction of, or derived 
                from, an entity which is not engaged in regular 
                and continuous transactions with persons which 
                are not related persons,
                  (C) there shall be disregarded any change in 
                the method of computing reserves a principal 
                purpose of which is the acceleration or 
                deferral of any item in order to claim the 
                benefits of this subsection or section 954(i),
                  (D) a contract of insurance or reinsurance 
                shall not be treated as an exempt contract (and 
                premiums from such contract shall not be taken 
                into account for purposes of paragraph (2)(B) 
                or (3)) if--
                          (i) any policyholder, insured, 
                        annuitant, or beneficiary is a resident 
                        of the United States and such contract 
                        was marketed to such resident and was 
                        written to cover a risk outside the 
                        United States, or
                          (ii) the contract covers risks 
                        located within and without the United 
                        States and the qualifying insurance 
                        company or qualifying insurance company 
                        branch does not maintain such 
                        contemporaneous records, and file such 
                        reports, with respect to such contract 
                        as the Secretary may require,
                  (E) the Secretary may prescribe rules for the 
                allocation of contracts (and income from 
                contracts) among 2 or more qualifying insurance 
                company branches of a qualifying insurance 
                company in order to clearly reflect the income 
                of such branches, and
                  (F) premiums from a contract shall not be 
                taken into account for purposes of paragraph 
                (2)(B) or (3) if such contract reinsures a 
                contract issued or reinsured by a related 
                person (as defined in section 954(d)(3)). For 
                purposes of subparagraph (D), the determination 
                of where risks are located shall be made under 
                the principles of section 953.
          (8) Coordination with subsection (c).--In determining 
        insurance income for purposes of subsection (c), exempt 
        insurance income shall not include income derived from 
        exempt contracts which cover risks other than 
        applicable home country risks.
          (9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection and section 954(i).
          (10) Application.--This subsection and section 954(i) 
        shall apply only to taxable years of a foreign 
        corporation beginning after December 31, 1998, and 
        before January 1, 2015, and to taxable years of United 
        States shareholders with or within which any such 
        taxable year of such foreign corporation ends. If this 
        subsection does not apply to a taxable year of a 
        foreign corporation beginning after December 31, 2014 
        (and taxable years of United States shareholders ending 
        with or within such taxable year), then, 
        notwithstanding the preceding sentence, subsection (a) 
        shall be applied to such taxable years in the same 
        manner as it would if the taxable year of the foreign 
        corporation began in 1998.
          (11) Cross reference.--For income exempt from foreign 
        personal holding company income, see section 954(i).

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)),
          (3) the foreign base company services income for the 
        taxable year (determined under subsection (e) and 
        reduced as provided in subsection (b)(5)),
          (5) the foreign base company oil related income for 
        the taxable year (determined under subsection (g) and 
        reduced as provided in subsection (b)(5)).
  (b) Exclusion and Special Rules.--
          (3) De minimis, etc., rules.--For purposes of 
        subsection (a) and section 953--
                  (A) De minimis rule.--If the sum of foreign 
                base company income (determined without regard 
                to paragraph (5)) and the gross insurance 
                income for the taxable year is less than the 
                lesser of--
                          (i) 5 percent of gross income, or
                          (ii) $1,000,000, no part of the gross 
                        income for the taxable year shall be 
                        treated as foreign base company income 
                        or insurance income.
                  (B) Foreign base company income and insurance 
                income in excess of 70 percent of gross 
                income.--If the sum of the foreign base company 
                income (determined without regard to paragraph 
                (5)) and the gross insurance income for the 
                taxable year exceeds 70 percent of gross 
                income, the entire gross income for the taxable 
                year shall, subject to the provisions of 
                paragraphs (4) and (5), be treated as foreign 
                base company income or insurance income 
                (whichever is appropriate).
                  (C) Gross insurance income.--For purposes of 
                subparagraphs (A) and (B), the term ``gross 
                insurance income'' means any item of gross 
                income taken into account in determining 
                insurance income under section 953.
          (4) Exception for certain income subject to high 
        foreign taxes.--For purposes of subsection (a) and 
        section 953, foreign base company income and insurance 
        income shall not include any item of income received by 
        a controlled foreign corporation if the taxpayer 
        establishes to the satisfaction of the Secretary that 
        such income was subject to an effective rate of income 
        tax imposed by a foreign country greater than 90 
        percent of the maximum rate of tax specified in section 
        11. The preceding sentence shall not apply to foreign 
        base company oil-related income described in subsection 
        (a)(5).
          (5) Deductions to be taken into account.--For 
        purposes of subsection (a), the foreign personal 
        holding company income, the foreign base company sales 
        income, the foreign base company services income,, and 
        the foreign base company oil related income shall be 
        reduced, under regulations prescribed by the Secretary 
        so as to take into account deductions (including taxes) 
        properly allocable to such income. Except to the extent 
        provided in regulations prescribed by the Secretary, 
        any interest which is paid or accrued by the controlled 
        foreign corporation to any United States shareholder in 
        such corporation (or any controlled foreign corporation 
        related to such a shareholder) shall be allocated first 
        to foreign personal holding company income which is 
        passive income (within the meaning of section 
        904(d)(2)) of such corporation to the extent thereof. 
        The Secretary may, by regulations, provide that the 
        preceding sentence shall apply also to interest paid or 
        accrued to other persons.
          (6) Foreign base company oil related income not 
        treated as another kind of base company income.--Income 
        of a corporation which is foreign base company oil 
        related income shall not be considered foreign base 
        company income of such corporation under paragraph (2), 
        or (3) of subsection (a).
  (c) Foreign Personal Holding Company Income.--
          (1) In general.--For purposes of subsection (a)(1), 
        the term ``foreign personal holding company income'' 
        means the portion of the gross income which consists 
        of:
                  (A) Dividends, etc..--Dividends, interest, 
                royalties, rents, and annuities.
                  (B) Certain property transactions.--The 
                excess of gains over losses from the sale or 
                exchange of property--
                          (i) which gives rise to income 
                        described in subparagraph (A) (after 
                        application of paragraph (2)(A)) other 
                        than property which gives rise to 
                        income not treated as foreign personal 
                        holding company income by reason of 
                        subsection (h) or (i) for the taxable 
                        year,
                          (ii) which is an interest in a trust, 
                        partnership, or REMIC, or
                          (iii) which does not give rise to any 
                        income.
                Gains and losses from the sale or exchange of 
                any property which, in the hands of the 
                controlled foreign corporation, is property 
                described in section 1221(a)(1) shall not be 
                taken into account under this subparagraph.
                  (C) Commodities transactions.--The excess of 
                gains over losses from transactions (including 
                futures, forward, and similar transactions) in 
                any commodities. This subparagraph shall not 
                apply to gains or losses which--
                          (i) arise out of commodity hedging 
                        transactions (as defined in paragraph 
                        (5)(A)),
                          (ii) are active business gains or 
                        losses from the sale of commodities, 
                        but only if substantially all of the 
                        controlled foreign corporation's 
                        commodities are property described in 
                        paragraph (1), (2), or (8) of section 
                        1221(a), or
                          (iii) are foreign currency gains or 
                        losses (as defined in section 988(b)) 
                        attributable to any section 988 
                        transactions.
                  (D) Foreign currency gains.--The excess of 
                foreign currency gains over foreign currency 
                losses (as defined in section 988(b)) 
                attributable to any section 988 transactions. 
                This subparagraph shall not apply in the case 
                of any transaction directly related to the 
                business needs of the controlled foreign 
                corporation.
                  (E) Income equivalent to interest.--Any 
                income equivalent to interest, including income 
                from commitment fees (or similar amounts) for 
                loans actually made.
                  (F) Income from notional principal 
                contracts.--
                          (i) In general.--Net income from 
                        notional principal contracts.
                          (ii) Coordination with other 
                        categories of foreign personal holding 
                        company income.--Any item of income, 
                        gain, deduction, or loss from a 
                        notional principal contract entered 
                        into for purposes of hedging any item 
                        described in any preceding subparagraph 
                        shall not be taken into account for 
                        purposes of this subparagraph but shall 
                        be taken into account under such other 
                        subparagraph.
                  (G) Payments in lieu of dividends.--Payments 
                in lieu of dividends which are made pursuant to 
                an agreement to which section 1058 applies.
                  (H) Personal service contracts.--
                          (i) Amounts received under a contract 
                        under which the corporation is to 
                        furnish personal services if--
                                  (I) some person other than 
                                the corporation has the right 
                                to designate (by name or by 
                                description) the individual who 
                                is to perform the services, or
                                  (II) the individual who is to 
                                perform the services is 
                                designated (by name or by 
                                description) in the contract, 
                                and
                          (ii) amounts received from the sale 
                        or other disposition of such a 
                        contract.
                This subparagraph shall apply with respect to 
                amounts received for services under a 
                particular contract only if at some time during 
                the taxable year 25 percent or more in value of 
                the outstanding stock of the corporation is 
                owned, directly or indirectly, by or for the 
                individual who has performed, is to perform, or 
                may be designated (by name or by description) 
                as the one to perform, such services.
          (2) Exception for certain amounts.--
                  (A) Rents and royalties derived in active 
                business.--Foreign personal holding company 
                income shall not include 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)). For purposes of 
                the preceding sentence, rents derived from 
                leasing an aircraft or vessel in foreign 
                commerce shall not fail to be treated as 
                derived in the active conduct of a trade or 
                business if, as determined under regulations 
                prescribed by the Secretary, the active leasing 
                expenses are not less than 10 percent of the 
                profit on the lease.
                  (B) Certain export financing.--Foreign 
                personal holding company income shall not 
                include any interest which is derived in the 
                conduct of a banking business and which is 
                export financing interest (as defined in 
                section 904(d)(2)(G)).
                  (C) Exception for dealers.--Except as 
                provided by regulations, in the case of a 
                regular dealer in property which is property 
                described in paragraph (1)(B), forward 
                contracts, option contracts, or similar 
                financial instruments (including notional 
                principal contracts and all instruments 
                referenced to commodities), there shall not be 
                taken into account in computing foreign 
                personal holding company income--
                          (i) any item of income, gain, 
                        deduction, or loss (other than any item 
                        described in subparagraph (A), (E), or 
                        (G) of paragraph (1)) from any 
                        transaction (including hedging 
                        transactions and transactions involving 
                        physical settlement) entered into in 
                        the ordinary course of such dealer's 
                        trade or business as such a dealer, and
                          (ii) if such dealer is a dealer in 
                        securities (within the meaning of 
                        section 475), any interest or dividend 
                        or equivalent amount described in 
                        subparagraph (E) or (G) of paragraph 
                        (1) from any transaction (including any 
                        hedging transaction or transaction 
                        described in section 956(c)(2)(I)) 
                        entered into in the ordinary course of 
                        such dealer's trade or business as such 
                        a dealer in securities, but only if the 
                        income from the transaction is 
                        attributable to activities of the 
                        dealer in the country under the laws of 
                        which the dealer is created or 
                        organized (or in the case of a 
                        qualified business unit described in 
                        section 989(a), is attributable to 
                        activities of the unit in the country 
                        in which the unit both maintains its 
                        principal office and conducts 
                        substantial business activity).
          (3) Certain income received from related persons.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the term ``foreign personal 
                holding company income'' does not include--
                          (i) dividends and interest received 
                        from a related person which (I) is a 
                        corporation 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, and
                          (ii) rents and royalties received 
                        from a corporation which is 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.
                To the extent provided in regulations, payments 
                made by a partnership with 1 or more corporate 
                partners shall be treated as made by such 
                corporate partners in proportion to their 
                respective interests in the partnership.
                  (B) Exception not to apply to items which 
                reduce subpart F income.--Subparagraph (A) 
                shall not apply in the case of any interest, 
                rent, or royalty to the extent such interest, 
                rent, or royalty reduces the payor's subpart F 
                income or creates (or increases) a deficit 
                which under section 952(c) may reduce the 
                subpart F income of the payor or another 
                controlled foreign corporation.
                  (C) Exception for certain dividends.--
                Subparagraph (A)(i) shall not apply to any 
                dividend with respect to any stock which is 
                attributable to earnings and profits of the 
                distributing corporation accumulated during any 
                period during which the person receiving such 
                dividend did not hold such stock either 
                directly, or indirectly through a chain of one 
                or more subsidiaries each of which meets the 
                requirements of subparagraph (A)(i).
          (4) Look-thru rule for certain partnership sales.--
                  (A) In general.--In the case of any sale by a 
                controlled foreign corporation of an interest 
                in a partnership with respect to which such 
                corporation is a 25-percent owner, such 
                corporation shall be treated for purposes of 
                this subsection as selling the proportionate 
                share of the assets of the partnership 
                attributable to such interest. The Secretary 
                shall prescribe such regulations as may be 
                appropriate to prevent abuse of the purposes of 
                this paragraph, including regulations providing 
                for coordination of this paragraph with the 
                provisions of subchapter K.
                  (B) 25-percent owner.--For purposes of this 
                paragraph, the term ``25-percent owner'' means 
                a controlled foreign corporation which owns 
                directly 25 percent or more of the capital or 
                profits interest in a partnership. For purposes 
                of the preceding sentence, if a controlled 
                foreign corporation is a shareholder or partner 
                of a corporation or partnership, the controlled 
                foreign corporation shall be treated as owning 
                directly its proportionate share of any such 
                capital or profits interest held directly or 
                indirectly by such corporation or partnership. 
                If a controlled foreign corporation is treated 
                as owning a capital or profits interest in a 
                partnership under constructive ownership rules 
                similar to the rules of section 958(b), the 
                controlled foreign corporation shall be treated 
                as owning such interest directly for purposes 
                of this subparagraph.
          (5) Definition and special rules relating to 
        commodity transactions.--
                  (A) Commodity hedging transactions.--For 
                purposes of paragraph (1)(C)(i), the term 
                ``commodity hedging transaction'' means any 
                transaction with respect to a commodity if such 
                transaction--
                          (i) is a hedging transaction as 
                        defined in section 1221(b)(2), 
                        determined--
                                  (I) without regard to 
                                subparagraph (A)(ii) thereof,
                                  (II) by applying subparagraph 
                                (A)(i) thereof by substituting 
                                ``ordinary property or property 
                                described in section 1231(b)'' 
                                for ``ordinary property'', and
                                  (III) by substituting 
                                ``controlled foreign 
                                corporation'' for ``taxpayer'' 
                                each place it appears, and
                          (ii) is clearly identified as such in 
                        accordance with section 1221(a)(7).
                  (B) Treatment of dealer activities under 
                paragraph (1)(C).--Commodities with respect to 
                which gains and losses are not taken into 
                account under paragraph (2)(C) in computing a 
                controlled foreign corporation's foreign 
                personal holding company income shall not be 
                taken into account in applying the 
                substantially all test under paragraph 
                (1)(C)(ii) to such corporation.
                  (C) Regulations.--The Secretary shall 
                prescribe such regulations as are appropriate 
                to carry out the purposes of paragraph (1)(C) 
                in the case of transactions involving related 
                parties.
          (6) Look-thru rule for related controlled foreign 
        corporations.--
                  (A) In general.--For purposes of this 
                subsection, dividends, interest, rents, and 
                royalties received or accrued from a controlled 
                foreign corporation which is a related person 
                shall not be treated as foreign personal 
                holding company income to the extent 
                attributable or properly allocable (determined 
                under rules similar to the rules of 
                subparagraphs (C) and (D) of section 904(d)(3)) 
                to income of the related person which is 
                neither subpart F income nor income treated as 
                effectively connected with the conduct of a 
                trade or business in the United States. For 
                purposes of this subparagraph, interest shall 
                include factoring income which is treated as 
                income equivalent to interest for purposes of 
                paragraph (1)(E). The Secretary shall prescribe 
                such regulations as may be necessary or 
                appropriate to carry out this paragraph, 
                including such regulations as may be necessary 
                or appropriate to prevent the abuse of the 
                purposes of this paragraph.
                  (B) Exception.--Subparagraph (A) shall not 
                apply in the case of any interest, rent, or 
                royalty to the extent such interest, rent, or 
                royalty creates (or increases) a deficit which 
                under section 952(c) may reduce the subpart F 
                income of the payor or another controlled 
                foreign corporation.
                  (C) Application.--Subparagraph (A) shall 
                apply to taxable years of foreign corporations 
                beginning after December 31, 2005, and before 
                January 1, 2015, and to taxable years of United 
                States shareholders with or within which such 
                taxable years of foreign corporations end.
  (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.
        For purposes of this subsection, personal property does 
        not include agricultural commodities which are not 
        grown in the United States in commercially marketable 
        quantities.
          (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 a wholly owned subsidiary 
        corporation deriving such income, under regulations 
        prescribed by the Secretary 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, 
                corporation, partnership, trust, or estate 
                which controls, or is controlled by, the 
                controlled foreign corporation, or
                  (B) such person is a corporation, 
                partnership, trust, or estate which is 
                controlled by the same person or persons which 
                control the controlled foreign corporation.
        For purposes of the preceding sentence, control means, 
        with respect to a corporation, the ownership, directly 
        or indirectly, of stock possessing more than 50 percent 
        of the total voting power of all classes of stock 
        entitled to vote or of the total value of stock of such 
        corporation. In the case of a partnership, trust, or 
        estate, control means the ownership, directly or 
        indirectly, of more than 50 percent (by value) of the 
        beneficial interests in such partnership, trust, or 
        estate. For purposes of this paragraph, rules similar 
        to the rules of section 958 shall apply.
          (4) Special rule for certain timber products.--For 
        purposes of subsection (a)(2), the term ``foreign base 
        company sales income'' includes any income (whether in 
        the form of profits, commissions, fees, or otherwise) 
        derived in connection with--
                  (A) the sale of any unprocessed timber 
                referred to in section 865(b), or
                  (B) the milling of any such timber outside 
                the United States.
        Subpart G shall not apply to any amount treated as 
        subpart F income by reason of this paragraph.
  (e) Foreign Base Company Services Income.--
          (1) In general.--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--
                  (A) are performed for or on behalf of any 
                related person (within the meaning of 
                subsection (d)(3)), and
                  (B) are performed outside the country under 
                the laws of which the controlled foreign 
                corporation is created or organized.
          (2) Exception.--Paragraph (1) shall not apply to 
        income derived in connection with the performance of 
        services which are directly related to--
                  (A) the sale or exchange by the controlled 
                foreign corporation of property manufactured, 
                produced, grown, or extracted by it and which 
                are performed before the time of the sale or 
                exchange, or
                  (B) an offer or effort to sell or exchange 
                such property.
        Paragraph (1) shall also not apply to income which is 
        exempt insurance income (as defined in section 953(e)) 
        or which is not treated as foreign personal holding 
        income by reason of subsection (c)(2)(C)(ii), (h), or 
        (i).
  (g) Foreign Base Company Oil Related Income.--For purposes of 
this section--
          (1) In general.--Except as otherwise provided in this 
        subsection, the term ``foreign base company oil related 
        income'' means foreign oil related income (within the 
        meaning of paragraphs (2) and (3) of section 907(c)) 
        other than income derived from a source within a 
        foreign country in connection with--
                  (A) oil or gas which was extracted from an 
                oil or gas well located in such foreign 
                country, or
                  (B) oil, gas, or a primary product of oil or 
                gas which is sold by the foreign corporation or 
                a related person for use or consumption within 
                such country or is loaded in such country on a 
                vessel or aircraft as fuel for such vessel or 
                aircraft.
        Such term shall not include any foreign personal 
        holding company income (as defined in subsection (c)).
          (2) Paragraph (1) applies only where corporation has 
        produced 1,000 barrels per day or more.--
                  (A) In general.--The term ``foreign base 
                company oil related income'' shall not include 
                any income of a foreign corporation if such 
                corporation is not a large oil producer for the 
                taxable year.
                  (B) Large oil producer.--For purposes of 
                subparagraph (A), the term ``large oil 
                producer'' means any corporation if, for the 
                taxable year or for the preceding taxable year, 
                the average daily production of foreign crude 
                oil and natural gas of the related group which 
                includes such corporation equaled or exceeded 
                1,000 barrels.
                  (C) Related group.--The term ``related 
                group'' means a group consisting of the foreign 
                corporation and any other person who is a 
                related person with respect to such 
                corporation.
                  (D) Average daily production of foreign crude 
                oil and natural gas.--For purposes of this 
                paragraph, the average daily production of 
                foreign crude oil or natural gas of any related 
                group for any taxable year (and the conversion 
                of cubic feet of natural gas into barrels) 
                shall be determined under rules similar to the 
                rules of section 613A except that only crude 
                oil or natural gas from a well located outside 
                the United States shall be taken into account.
  (h) Special Rule for Income Derived in the Active Conduct of 
Banking, Financing, or Similar Businesses.--
          (1) In general.--For purposes of subsection (c)(1), 
        foreign personal holding company income shall not 
        include qualified banking or financing income of an 
        eligible controlled foreign corporation.
          (2) Eligible controlled foreign corporation.--For 
        purposes of this subsection--
                  (A) In general.--The term ``eligible 
                controlled foreign corporation'' means a 
                controlled foreign corporation which--
                          (i) is predominantly engaged in the 
                        active conduct of a banking, financing, 
                        or similar business, and
                          (ii) conducts substantial activity 
                        with respect to such business.
                  (B) Predominantly engaged.--A controlled 
                foreign corporation shall be treated as 
                predominantly engaged in the active conduct of 
                a banking, financing, or similar business if--
                          (i) more than 70 percent of the gross 
                        income of the controlled foreign 
                        corporation is derived directly from 
                        the active and regular conduct of a 
                        lending or finance business from 
                        transactions with customers which are 
                        not related persons,
                          (ii) it is engaged in the active 
                        conduct of a banking business and is an 
                        institution licensed to do business as 
                        a bank in the United States (or is any 
                        other corporation not so licensed which 
                        is specified by the Secretary in 
                        regulations), or
                          (iii) it is engaged in the active 
                        conduct of a securities business and is 
                        registered as a securities broker or 
                        dealer under section 15(a) of the 
                        Securities Exchange Act of 1934 or is 
                        registered as a Government securities 
                        broker or dealer under section 15C(a) 
                        of such Act (or is any other 
                        corporation not so registered which is 
                        specified by the Secretary in 
                        regulations).
          (3) Qualified banking or financing income.--For 
        purposes of this subsection--
                  (A) In general.--The term ``qualified banking 
                or financing income'' means income of an 
                eligible controlled foreign corporation which--
                          (i) is derived in the active conduct 
                        of a banking, financing, or similar 
                        business by--
                                  (I) such eligible controlled 
                                foreign corporation, or
                                  (II) a qualified business 
                                unit of such eligible 
                                controlled foreign corporation,
                          (ii) is derived from one or more 
                        transactions--
                                  (I) with customers located in 
                                a country other than the United 
                                States, and
                                  (II) substantially all of the 
                                activities in connection with 
                                which are conducted directly by 
                                the corporation or unit in its 
                                home country, and
                          (iii) is treated as earned by such 
                        corporation or unit in its home country 
                        for purposes of such country's tax 
                        laws.
                  (B) Limitation on nonbanking and 
                nonsecurities businesses.--No income of an 
                eligible controlled foreign corporation not 
                described in clause (ii) or (iii) of paragraph 
                (2)(B) (or of a qualified business unit of such 
                corporation) shall be treated as qualified 
                banking or financing income unless more than 30 
                percent of such corporation's or unit's gross 
                income is derived directly from the active and 
                regular conduct of a lending or finance 
                business from transactions with customers which 
                are not related persons and which are located 
                within such corporation's or unit's home 
                country.
                  (C) Substantial activity requirement for 
                cross border income.--The term ``qualified 
                banking or financing income'' shall not include 
                income derived from 1 or more transactions with 
                customers located in a country other than the 
                home country of the eligible controlled foreign 
                corporation or a qualified business unit of 
                such corporation unless such corporation or 
                unit conducts substantial activity with respect 
                to a banking, financing, or similar business in 
                its home country.
                  (D) Determinations made separately.--For 
                purposes of this paragraph, the qualified 
                banking or financing income of an eligible 
                controlled foreign corporation and each 
                qualified business unit of such corporation 
                shall be determined separately for such 
                corporation and each such unit by taking into 
                account--
                          (i) in the case of the eligible 
                        controlled foreign corporation, only 
                        items of income, deduction, gain, or 
                        loss and activities of such corporation 
                        not properly allocable or attributable 
                        to any qualified business unit of such 
                        corporation, and
                          (ii) in the case of a qualified 
                        business unit, only items of income, 
                        deduction, gain, or loss and activities 
                        properly allocable or attributable to 
                        such unit.
                  (E) Direct conduct of activities.--For 
                purposes of subparagraph (A)(ii)(II), an 
                activity shall be treated as conducted directly 
                by an eligible controlled foreign corporation 
                or qualified business unit in its home country 
                if the activity is performed by employees of a 
                related person and--
                          (i) the related person is an eligible 
                        controlled foreign corporation the home 
                        country of which is the same as the 
                        home country of the corporation or unit 
                        to which subparagraph (A)(ii)(II) is 
                        being applied,
                          (ii) the activity is performed in the 
                        home country of the related person, and
                          (iii) the related person is 
                        compensated on an arm's- length basis 
                        for the performance of the activity by 
                        its employees and such compensation is 
                        treated as earned by such person in its 
                        home country for purposes of the home 
                        country's tax laws.
          (4) Lending or finance business.--For purposes of 
        this subsection, the term ``lending or finance 
        business'' means the business of--
                  (A) making loans,
                  (B) purchasing or discounting accounts 
                receivable, notes, or installment obligations,
                  (C) engaging in leasing (including entering 
                into leases and purchasing, servicing, and 
                disposing of leases and leased assets),
                  (D) issuing letters of credit or providing 
                guarantees,
                  (E) providing charge and credit card 
                services, or
                  (F) rendering services or making facilities 
                available in connection with activities 
                described in subparagraphs (A) through (E) 
                carried on by--
                          (i) the corporation (or qualified 
                        business unit) rendering services or 
                        making facilities available, or
                          (ii) another corporation (or 
                        qualified business unit of a 
                        corporation) which is a member of the 
                        same affiliated group (as defined in 
                        section 1504, but determined without 
                        regard to section 1504(b)(3)).
          (5) Other definitions.--For purposes of this 
        subsection--
                  (A) Customer.--The term ``customer'' means, 
                with respect to any controlled foreign 
                corporation or qualified business unit, any 
                person which has a customer relationship with 
                such corporation or unit and which is acting in 
                its capacity as such.
                  (B) Home country.--Except as provided in 
                regulations--
                          (i) Controlled foreign corporation.--
                        The term ``home country'' means, with 
                        respect to any controlled foreign 
                        corporation, the country under the laws 
                        of which the corporation was created or 
                        organized.
                          (ii) Qualified business unit.--The 
                        term ``home country'' means, with 
                        respect to any qualified business unit, 
                        the country in which such unit 
                        maintains its principal office.
                  (C) Located.--The determination of where a 
                customer is located shall be made under rules 
                prescribed by the Secretary.
                  (D) Qualified business unit.--The term 
                ``qualified business unit'' has the meaning 
                given such term by section 989(a).
                  (E) Related person.--The term ``related 
                person'' has the meaning given such term by 
                subsection (d)(3).
          (6) Coordination with exception for dealers.--
        Paragraph (1) shall not apply to income described in 
        subsection (c)(2)(C)(ii) of a dealer in securities 
        (within the meaning of section 475) which is an 
        eligible controlled foreign corporation described in 
        paragraph (2)(B)(iii).
          (7) Anti-abuse rules.--For purposes of applying this 
        subsection and subsection (c)(2)(C)(ii)--
                  (A) there shall be disregarded any item of 
                income, gain, loss, or deduction with respect 
                to any transaction or series of transactions 
                one of the principal purposes of which is 
                qualifying income or gain for the exclusion 
                under this section, including any transaction 
                or series of transactions a principal purpose 
                of which is the acceleration or deferral of any 
                item in order to claim the benefits of such 
                exclusion through the application of this 
                subsection,
                  (B) there shall be disregarded any item of 
                income, gain, loss, or deduction of an entity 
                which is not engaged in regular and continuous 
                transactions with customers which are not 
                related persons,
                  (C) there shall be disregarded any item of 
                income, gain, loss, or deduction with respect 
                to any transaction or series of transactions 
                utilizing, or doing business with--
                          (i) one or more entities in order to 
                        satisfy any home country requirement 
                        under this subsection, or
                          (ii) a special purpose entity or 
                        arrangement, including a 
                        securitization, financing, or similar 
                        entity or arrangement,
                if one of the principal purposes of such 
                transaction or series of transactions is 
                qualifying income or gain for the exclusion 
                under this subsection, and
                  (D) a related person, an officer, a director, 
                or an employee with respect to any controlled 
                foreign corporation (or qualified business 
                unit) which would otherwise be treated as a 
                customer of such corporation or unit with 
                respect to any transaction shall not be so 
                treated if a principal purpose of such 
                transaction is to satisfy any requirement of 
                this subsection.
          (8) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection, subsection 
        (c)(1)(B)(i), subsection (c)(2)(C)(ii), and the last 
        sentence of subsection (e)(2).
          (9) Application.--This subsection, subsection 
        (c)(2)(C)(ii), and the last sentence of subsection 
        (e)(2) shall apply only to taxable years of a foreign 
        corporation beginning after December 31, 1998, and 
        before January 1, 2015, and to taxable years of United 
        States shareholders with or within which any such 
        taxable year of such foreign corporation ends.
  (i) Special Rule for Income Derived in the Active Conduct of 
Insurance Business.--
          (1) In general.--For purposes of subsection (c)(1), 
        foreign personal holding company income shall not 
        include qualified insurance income of a qualifying 
        insurance company.
          (2) Qualified insurance income.--The term ``qualified 
        insurance income'' means income of a qualifying 
        insurance company which is--
                  (A) received from a person other than a 
                related person (within the meaning of 
                subsection (d)(3)) and derived from the 
                investments made by a qualifying insurance 
                company or a qualifying insurance company 
                branch of its reserves allocable to exempt 
                contracts or of 80 percent of its unearned 
                premiums from exempt contracts (as both are 
                determined in the manner prescribed under 
                paragraph (4)), or
                  (B) received from a person other than a 
                related person (within the meaning of 
                subsection (d)(3)) and derived from investments 
                made by a qualifying insurance company or a 
                qualifying insurance company branch of an 
                amount of its assets allocable to exempt 
                contracts equal to--
                          (i) in the case of property, 
                        casualty, or health insurance 
                        contracts, one-third of its premiums 
                        earned on such insurance contracts 
                        during the taxable year (as defined in 
                        section 832(b)(4)), and
                          (ii) in the case of life insurance or 
                        annuity contracts, 10 percent of the 
                        reserves described in subparagraph (A) 
                        for such contracts.
          (3) Principles for determining insurance income.--
        Except as provided by the Secretary, for purposes of 
        subparagraphs (A) and (B) of paragraph (2)--
                  (A) in the case of any contract which is a 
                separate account-type contract (including any 
                variable contract not meeting the requirements 
                of section 817), income credited under such 
                contract shall be allocable only to such 
                contract, and
                  (B) income not allocable under subparagraph 
                (A) shall be allocated ratably among contracts 
                not described in subparagraph (A).
          (4) Methods for determining unearned premiums and 
        reserves.--For purposes of paragraph (2)(A)--
                  (A) Property and casualty contracts.--The 
                unearned premiums and reserves of a qualifying 
                insurance company or a qualifying insurance 
                company branch with respect to property, 
                casualty, or health insurance contracts shall 
                be determined using the same methods and 
                interest rates which would be used if such 
                company or branch were subject to tax under 
                subchapter L, except that--
                          (i) the interest rate determined for 
                        the functional currency of the company 
                        or branch, and which, except as 
                        provided by the Secretary, is 
                        calculated in the same manner as the 
                        Federal mid-term rate under section 
                        1274(d), shall be substituted for the 
                        applicable Federal interest rate, and
                          (ii) such company or branch shall use 
                        the appropriate foreign loss payment 
                        pattern.
                  (B) Life insurance and annuity contracts.--
                          (i) In general.--Except as provided 
                        in clause (ii), the amount of the 
                        reserve of a qualifying insurance 
                        company or qualifying insurance company 
                        branch for any life insurance or 
                        annuity contract shall be equal to the 
                        greater of--
                                  (I) the net surrender value 
                                of such contract (as defined in 
                                section 807(e)(1)(A)), or
                                  (II) the reserve determined 
                                under paragraph (5).
                          (ii) Ruling request, etc.--The amount 
                        of the reserve under clause (i) shall 
                        be the foreign statement reserve for 
                        the contract (less any catastrophe, 
                        deficiency, equalization, or similar 
                        reserves), if, pursuant to a ruling 
                        request submitted by the taxpayer or as 
                        provided in published guidance, the 
                        Secretary determines that the factors 
                        taken into account in determining the 
                        foreign statement reserve provide an 
                        appropriate means of measuring income.
                  (C) Limitation on reserves.--In no event 
                shall the reserve determined under this 
                paragraph for any contract as of any time 
                exceed the amount which would be taken into 
                account with respect to such contract as of 
                such time in determining foreign statement 
                reserves (less any catastrophe, deficiency, 
                equalization, or similar reserves).
          (5) Amount of reserve.--The amount of the reserve 
        determined under this paragraph with respect to any 
        contract shall be determined in the same manner as it 
        would be determined if the qualifying insurance company 
        or qualifying insurance company branch were subject to 
        tax under subchapter L, except that in applying such 
        subchapter--
                  (A) the interest rate determined for the 
                functional currency of the company or branch, 
                and which, except as provided by the Secretary, 
                is calculated in the same manner as the Federal 
                mid-term rate under section 1274(d), shall be 
                substituted for the applicable Federal interest 
                rate,
                  (B) the highest assumed interest rate 
                permitted to be used in determining foreign 
                statement reserves shall be substituted for the 
                prevailing State assumed interest rate, and
                  (C) tables for mortality and morbidity which 
                reasonably reflect the current mortality and 
                morbidity risks in the company's or branch's 
                home country shall be substituted for the 
                mortality and morbidity tables otherwise used 
                for such subchapter.
        The Secretary may provide that the interest rate and 
        mortality and morbidity tables of a qualifying 
        insurance company may be used for 1 or more of its 
        qualifying insurance company branches when appropriate.
          (6) Definitions.--For purposes of this subsection, 
        any term used in this subsection which is also used in 
        section 953(e) shall have the meaning given such term 
        by section 953.

           *       *       *       *       *       *       *

      B. Changes in Existing Law Proposed by the Bill, as Reported

    In compliance with clause 3(e)(1)(A) of rule XIII of the 
Rules of the House of Representatives, the text of each section 
proposed to be amended or repealed by the bill, as reported, is 
shown below:

       Changes in Existing Law Proposed by the Bill, as Reported

  In compliance with clause 3(e)(1)(B) of rule XIII of the 
Rules of the House of Representatives, changes in existing law 
proposed by the bill, as reported, are shown as follows 
(existing law proposed to be omitted is enclosed in black 
brackets, new matter is printed in italic, and existing law in 
which no change is proposed is shown in roman):

                     INTERNAL REVENUE CODE OF 1986

           *       *       *       *       *       *       *
Subtitle A--Income Taxes

           *       *       *       *       *       *       *

CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *

 Subchapter N--Tax Based on Income From Sources Within or Without the 
United States

           *       *       *       *       *       *       *

PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES

           *       *       *       *       *       *       *

Subpart F--Controlled Foreign Corporations

           *       *       *       *       *       *       *

SEC. 953. INSURANCE INCOME.

  (a) Insurance Income.--
          (1) In general.--For purposes of section 952(a)(1), 
        the term ``insurance income'' means any income which--
                  (A) is attributable to the issuing (or 
                reinsuring) of an insurance or annuity 
                contract, and
                  (B) would (subject to the modifications 
                provided by subsection (b)) be taxed under 
                subchapter L of this chapter if such income 
                were the income of a domestic insurance 
                company.
          (2) Exception.--Such term shall not include any 
        exempt insurance income (as defined in subsection (e)).
  (b) Special Rules.--For purposes of subsection (a)--
          (1) The following provisions of subchapter L shall 
        not apply:
                  (A) The small life insurance company 
                deduction.
                  (B) Section 805(a)(5) (relating to operations 
                loss deduction).
                  (C) Section 832(c)(5) (relating to certain 
                capital losses).
          (2) The items referred to in--
                  (A) section 803(a)(1) (relating to gross 
                amount of premiums and other considerations),
                  (B) section 803(a)(2) (relating to net 
                decrease in reserves),
                  (C) section 805(a)(2) (relating to net 
                increase in reserves), and
                  (D) section 832(b)(4) (relating to premiums 
                earned on insurance contracts),
        shall be taken into account only to the extent they are 
        in respect of any reinsurance or the issuing of any 
        insurance or annuity contract described in subsection 
        (a)(1).
          (3) Reserves for any insurance or annuity contract 
        shall be determined in the same manner as under section 
        954(i).
          (4) All items of income, expenses, losses, and 
        deductions shall be properly allocated or apportioned 
        under regulations prescribed by the Secretary.
  (c) Special Rule for Certain Captive Insurance Companies.--
          (1) In general.--For purposes only of taking into 
        account related person insurance income--
                  (A) the term ``United States shareholder'' 
                means, with respect to any foreign corporation, 
                a United States person (as defined in section 
                957(c)) who owns (within the meaning of section 
                958(a)) any stock of the foreign corporation,
                  (B) the term ``controlled foreign 
                corporation'' has the meaning given to such 
                term by section 957(a) determined by 
                substituting ``25 percent or more'' for ``more 
                than 50 percent'', and
                  (C) the pro rata share referred to in section 
                951(a)(1)(A)(i) shall be determined under 
                paragraph (5) of this subsection.
          (2) Related person insurance income.--For purposes of 
        this subsection, the term ``related person insurance 
        income'' means any insurance income (within the meaning 
        of subsection (a)) attributable to a policy of 
        insurance or reinsurance with respect to which the 
        person (directly or indirectly) insured is a United 
        States shareholder in the foreign corporation or a 
        related person to such a shareholder.
          (3) Exceptions.--
                  (A) Corporations not held by insured.--
                Paragraph (1) shall not apply to any foreign 
                corporation if at all times during the taxable 
                year of such foreign corporation--
                          (i) less than 20 percent of the total 
                        combined voting power of all classes of 
                        stock of such corporation entitled to 
                        vote, and
                          (ii) less than 20 percent of the 
                        total value of such corporation,
                is owned (directly or indirectly under the 
                principles of section 883(c)(4)) by persons who 
                are (directly or indirectly) insured under any 
                policy of insurance or reinsurance issued by 
                such corporation or who are related persons to 
                any such person.
                  (B) De minimis exception.--Paragraph (1) 
                shall not apply to any foreign corporation for 
                a taxable year of such corporation if the 
                related person insurance income (determined on 
                a gross basis) of such corporation for such 
                taxable year is less than 20 percent of its 
                insurance income (as so determined) for such 
                taxable year determined without regard to those 
                provisions of subsection (a)(1) which limit 
                insurance income to income from countries other 
                than the country in which the corporation was 
                created or organized.
                  (C) Election to treat income as effectively 
                connected.--Paragraph (1) shall not apply to 
                any foreign corporation for any taxable year 
                if--
                          (i) such corporation elects (at such 
                        time and in such manner as the 
                        Secretary may prescribe)--
                                  (I) to treat its related 
                                person insurance income for 
                                such taxable year as income 
                                effectively connected with the 
                                conduct of a trade or business 
                                in the United States, and
                                  (II) to waive all benefits 
                                (other than with respect to 
                                section 884) with respect to 
                                related person insurance income 
                                granted by the United States 
                                under any treaty between the 
                                United States and any foreign 
                                country, and
                          (ii) such corporation meets such 
                        requirements as the Secretary shall 
                        prescribe to ensure that the tax 
                        imposed by this chapter on such income 
                        is paid.
                An election under this subparagraph made for 
                any taxable year shall not be effective if the 
                corporation (or any predecessor thereof) was a 
                disqualified corporation for the taxable year 
                for which the election was made or for any 
                prior taxable year beginning after 1986.
                  (D) Special rules for subparagraph (C)
                          (i) Period during which election in 
                        effect.--
                                  (I) In general.--Except as 
                                provided in subclause (II), any 
                                election under subparagraph (C) 
                                shall apply to the taxable year 
                                for which made and all 
                                subsequent taxable years unless 
                                revoked with the consent of the 
                                Secretary.
                                  (II) Termination.--If a 
                                foreign corporation which made 
                                an election under subparagraph 
                                (C) for any taxable year is a 
                                disqualified corporation for 
                                any subsequent taxable year, 
                                such election shall not apply 
                                to any taxable year beginning 
                                after such subsequent taxable 
                                year.
                          (ii) Exemption from tax imposed by 
                        section 4371.--The tax imposed by 
                        section 4371 shall not apply with 
                        respect to any related person insurance 
                        income treated as effectively connected 
                        with the conduct of a trade or business 
                        within the United States under 
                        subparagraph (C).
                  (E) Disqualified corporation.--For purposes 
                of this paragraph the term ``disqualified 
                corporation'' means, with respect to any 
                taxable year, any foreign corporation which is 
                a controlled foreign corporation for an 
                uninterrupted period of 30 days or more during 
                such taxable year (determined without regard to 
                this subsection) but only if a United States 
                shareholder (determined without regard to this 
                subsection) owns (within the meaning of section 
                958(a)) stock in such corporation at some time 
                during such taxable year.
          (4) Treatment of mutual insurance companies.--In the 
        case of a mutual insurance company--
                  (A) this subsection shall apply,
                  (B) policyholders of such company shall be 
                treated as shareholders, and
                  (C) appropriate adjustments in the 
                application of this subpart shall be made under 
                regulations prescribed by the Secretary.
          (5) Determination of pro rata share.--
                  (A) In general.--The pro rata share 
                determined under this paragraph for any United 
                States shareholder is the lesser of--
                          (i) the amount which would be 
                        determined under paragraph (2) of 
                        section 951(a) if--
                                  (I) only related person 
                                insurance income were taken 
                                into account,
                                  (II) stock owned (within the 
                                meaning of section 958(a)) by 
                                United States shareholders on 
                                the last day of the taxable 
                                year were the only stock in the 
                                foreign corporation, and
                                  (III) only distributions 
                                received by United States 
                                shareholders were taken into 
                                account under subparagraph (B) 
                                of such paragraph (2), or
                          (ii) the amount which would be 
                        determined under paragraph (2) of 
                        section 951(a) if the entire earnings 
                        and profits of the foreign corporation 
                        for the taxable year were subpart F 
                        income.
                  (B) Coordination with other provisions.--The 
                Secretary shall prescribe regulations providing 
                for such modifications to the provisions of 
                this subpart as may be necessary or appropriate 
                by reason of subparagraph (A).
          (6) Related person.--For purposes of this 
        subsection--
                  (A) In general.--Except as provided in 
                subparagraph (B), the term ``related person'' 
                has the meaning given such term by section 
                954(d)(3).
                  (B) Treatment of certain liability insurance 
                policies.--In the case of any policy of 
                insurance covering liability arising from 
                services performed as a director, officer, or 
                employee of a corporation or as a partner or 
                employee of a partnership, the person 
                performing such services and the entity for 
                which such services are performed shall be 
                treated as related persons.
          (7) Coordination with section 1248.--For purposes of 
        section 1248, if any person is (or would be but for 
        paragraph (3)) treated under paragraph (1) as a United 
        States shareholder with respect to any foreign 
        corporation which would be taxed under subchapter L if 
        it were a domestic corporation and which is (or would 
        be but for paragraph (3)) treated under paragraph (1) 
        as a controlled foreign corporation--
                  (A) such person shall be treated as meeting 
                the stock ownership requirements of section 
                1248(a)(2) with respect to such foreign 
                corporation, and
                  (B) such foreign corporation shall be treated 
                as a controlled foreign corporation.
          (8) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the 
        purposes of this subsection, including--
                  (A) regulations preventing the avoidance of 
                this subsection through cross insurance 
                arrangements or otherwise, and
                  (B) regulations which may provide that a 
                person will not be treated as a United States 
                shareholder under paragraph (1) with respect to 
                any foreign corporation if neither such person 
                (nor any related person to such person) is 
                (directly or indirectly) insured under any 
                policy of insurance or reinsurance issued by 
                such foreign corporation.
  (d) Election by Foreign Insurance Company to be Treated as 
Domestic Corporation.--
          (1) In general.--If--
                  (A) a foreign corporation is a controlled 
                foreign corporation (as defined in section 
                957(a) by substituting ``25 percent or more'' 
                for ``more than 50 percent'' and by using the 
                definition of United States shareholder under 
                953(c)(1)(A)),
                  (B) such foreign corporation would qualify 
                under part I or II of subchapter L for the 
                taxable year if it were a domestic corporation,
                  (C) such foreign corporation meets such 
                requirements as the Secretary shall prescribe 
                to ensure that the taxes imposed by this 
                chapter on such foreign corporation are paid, 
                and
                  (D) such foreign corporation makes an 
                election to have this paragraph apply and 
                waives all benefits to such corporation granted 
                by the United States under any treaty,
        for purposes of this title, such corporation shall be 
        treated as a domestic corporation.
          (2) Period during which election is in effect.--
                  (A) In general.--Except as provided in 
                subparagraph (B), an election under paragraph 
                (1) shall apply to the taxable year for which 
                made and all subsequent taxable years unless 
                revoked with the consent of the Secretary.
                  (B) Termination.--If a corporation which made 
                an election under paragraph (1) for any taxable 
                year fails to meet the requirements of 
                subparagraphs (A), (B), and (C), of paragraph 
                (1) for any subsequent taxable year, such 
                election shall not apply to any taxable year 
                beginning after such subsequent taxable year.
          (3) Treatment of losses.--If any corporation treated 
        as a domestic corporation under this subsection is 
        treated as a member of an affiliated group for purposes 
        of chapter 6 (relating to consolidated returns), any 
        loss of such corporation shall be treated as a dual 
        consolidated loss for purposes of section 1503(d) 
        without regard to paragraph (2)(B) thereof.
          (4) Effect of election.--
                  (A) In general.--For purposes of section 367, 
                any foreign corporation making an election 
                under paragraph (1) shall be treated as 
                transferring (as of the 1st day of the 1st 
                taxable year to which such election applies) 
                all of its assets to a domestic corporation in 
                connection with an exchange to which section 
                354 applies.
                  (B) Exception for pre-1988 earnings and 
                profit.--
                          (i) In general.--Earnings and profits 
                        of the foreign corporation accumulated 
                        in taxable years beginning before 
                        January 1, 1988, shall not be included 
                        in the gross income of the persons 
                        holding stock in such corporation by 
                        reason of subparagraph (A).
                          (ii) Treatment of distributions.--For 
                        purposes of this title, any 
                        distribution made by a corporation to 
                        which an election under paragraph (1) 
                        applies out of earnings and profits 
                        accumulated in taxable years beginning 
                        before January 1, 1988, shall be 
                        treated as a distribution made by a 
                        foreign corporation.
                          (iii) Certain rules to continue to 
                        apply to pre-1988 earnings.--The 
                        provisions specified in clause (iv) 
                        shall be applied without regard to 
                        paragraph (1), except that, in the case 
                        of a corporation to which an election 
                        under paragraph (1) applies, only 
                        earnings and profits accumulated in 
                        taxable years beginning before January 
                        1, 1988, shall be taken into account.
                          (iv) Specified provisions.--The 
                        provisions specified in this clause 
                        are:
                                  (I) Section 1248 (relating to 
                                gain from certain sales or 
                                exchanges of stock in certain 
                                foreign corporations).
                                  (II) Subpart F of part III of 
                                subchapter N to the extent such 
                                subpart relates to earnings 
                                invested in United States 
                                property or amounts referred to 
                                in clause (ii) or (iii) of 
                                section 951(a)(1)(A).
                                  (III) Section 884 to the 
                                extent the foreign corporation 
                                reinvested 1987 earnings and 
                                profits in United States 
                                assets.
          (5) Effect of termination.--For purposes of section 
        367, if--
                  (A) an election is made by a corporation 
                under paragraph (1) for any taxable year, and
                  (B) such election ceases to apply for any 
                subsequent taxable year,
        such corporation shall be treated as a domestic 
        corporation transferring (as of the 1st day of such 
        subsequent taxable year) all of its property to a 
        foreign corporation in connection with an exchange to 
        which section 354 applies.
          (6) Additional tax on corporation making election.--
                  (A) In general.--If a corporation makes an 
                election under paragraph (1), the amount of tax 
                imposed by this chapter for the 1st taxable 
                year to which such election applies shall be 
                increased by the amount determined under 
                subparagraph (B).
                  (B) Amount of tax.--The amount of tax 
                determined under this paragraph shall be equal 
                to the lesser of--
                          (i) 3/4 of 1 percent of the aggregate 
                        amount of capital and accumulated 
                        surplus of the corporation as of 
                        December 31, 1987, or
                          (ii) $1,500,000.
  (e) Exempt Insurance Income.--For purposes of this section--
          (1) Exempt insurance income defined.--
                  (A) In general.--The term ``exempt insurance 
                income'' means income derived by a qualifying 
                insurance company which--
                          (i) is attributable to the issuing 
                        (or reinsuring) of an exempt contract 
                        by such company or a qualifying 
                        insurance company branch of such 
                        company, and
                          (ii) is treated as earned by such 
                        company or branch in its home country 
                        for purposes of such country's tax 
                        laws.
                  (B) Exception for certain arrangements.--Such 
                term shall not include income attributable to 
                the issuing (or reinsuring) of an exempt 
                contract as the result of any arrangement 
                whereby another corporation receives a 
                substantially equal amount of premiums or other 
                consideration in respect of issuing (or 
                reinsuring) a contract which is not an exempt 
                contract.
                  (C) Determinations made separately.--For 
                purposes of this subsection and section 954(i), 
                the exempt insurance income and exempt 
                contracts of a qualifying insurance company or 
                any qualifying insurance company branch of such 
                company shall be determined separately for such 
                company and each such branch by taking into 
                account--
                          (i) in the case of the qualifying 
                        insurance company, only items of 
                        income, deduction, gain, or loss, and 
                        activities of such company not properly 
                        allocable or attributable to any 
                        qualifying insurance company branch of 
                        such company, and
                          (ii) in the case of a qualifying 
                        insurance company branch, only items of 
                        income, deduction, gain, or loss and 
                        activities properly allocable or 
                        attributable to such branch.
          (2) Exempt contract.--
                  (A) In general.--The term ``exempt contract'' 
                means an insurance or annuity contract issued 
                or reinsured by a qualifying insurance company 
                or qualifying insurance company branch in 
                connection with property in, liability arising 
                out of activity in, or the lives or health of 
                residents of, a country other than the United 
                States.
                  (B) Minimum home country income required.--
                          (i) In general.--No contract of a 
                        qualifying insurance company or of a 
                        qualifying insurance company branch 
                        shall be treated as an exempt contract 
                        unless such company or branch derives 
                        more than 30 percent of its net written 
                        premiums from exempt contracts 
                        (determined without regard to this 
                        subparagraph)--
                                  (I) which cover applicable 
                                home country risks, and
                                  (II) with respect to which no 
                                policyholder, insured, 
                                annuitant, or beneficiary is a 
                                related person (as defined in 
                                section 954(d)(3)).
                          (ii) Applicable home country risks.--
                        The term ``applicable home country 
                        risks'' means risks in connection with 
                        property in, liability arising out of 
                        activity in, or the lives or health of 
                        residents of, the home country of the 
                        qualifying insurance company or 
                        qualifying insurance company branch, as 
                        the case may be, issuing or reinsuring 
                        the contract covering the risks.
                  (C) Substantial activity requirements for 
                cross border risks.--A contract issued by a 
                qualifying insurance company or qualifying 
                insurance company branch which covers risks 
                other than applicable home country risks (as 
                defined in subparagraph (B)(ii)) shall not be 
                treated as an exempt contract unless such 
                company or branch, as the case may be--
                          (i) conducts substantial activity 
                        with respect to an insurance business 
                        in its home country, and
                          (ii) performs in its home country 
                        substantially all of the activities 
                        necessary to give rise to the income 
                        generated by such contract.
          (3) Qualifying insurance company.--The term 
        ``qualifying insurance company'' means any controlled 
        foreign corporation which--
                  (A) is subject to regulation as an insurance 
                (or reinsurance) company by its home country, 
                and is licensed, authorized, or regulated by 
                the applicable insurance regulatory body for 
                its home country to sell insurance, 
                reinsurance, or annuity contracts to persons 
                other than related persons (within the meaning 
                of section 954(d)(3)) in such home country,
                  (B) derives more than 50 percent of its 
                aggregate net written premiums from the 
                issuance or reinsurance by such controlled 
                foreign corporation and each of its qualifying 
                insurance company branches of contracts--
                          (i) covering applicable home country 
                        risks (as defined in paragraph (2)) of 
                        such corporation or branch, as the case 
                        may be, and
                          (ii) with respect to which no 
                        policyholder, insured, annuitant, or 
                        beneficiary is a related person (as 
                        defined in section 954(d)(3)),
                except that in the case of a branch, such 
                premiums shall only be taken into account to 
                the extent such premiums are treated as earned 
                by such branch in its home country for purposes 
                of such country's tax laws, and
                  (C) is engaged in the insurance business and 
                would be subject to tax under subchapter L if 
                it were a domestic corporation.
          (4) Qualifying insurance company branch.--The term 
        ``qualifying insurance company branch'' means a 
        qualified business unit (within the meaning of section 
        989(a)) of a controlled foreign corporation if--
                  (A) such unit is licensed, authorized, or 
                regulated by the applicable insurance 
                regulatory body for its home country to sell 
                insurance, reinsurance, or annuity contracts to 
                persons other than related persons (within the 
                meaning of section 954(d)(3)) in such home 
                country, and
                  (B) such controlled foreign corporation is a 
                qualifying insurance company, determined under 
                paragraph (3) as if such unit were a qualifying 
                insurance company branch.
          (5) Life insurance or annuity contract.--For purposes 
        of this section and section 954, the determination of 
        whether a contract issued by a controlled foreign 
        corporation or a qualified business unit (within the 
        meaning of section 989(a)) is a life insurance contract 
        or an annuity contract shall be made without regard to 
        sections 72(s), 101(f), 817(h), and 7702 if--
                  (A) such contract is regulated as a life 
                insurance or annuity contract by the 
                corporation's or unit's home country, and
                  (B) no policyholder, insured, annuitant, or 
                beneficiary with respect to the contract is a 
                United States person.
          (6) Home country.--For purposes of this subsection, 
        except as provided in regulations--
                  (A) Controlled foreign corporation.--The term 
                ``home country'' means, with respect to a 
                controlled foreign corporation, the country in 
                which such corporation is created or organized.
                  (B) Qualified business unit.--The term ``home 
                country'' means, with respect to a qualified 
                business unit (as defined in section 989(a)), 
                the country in which the principal office of 
                such unit is located and in which such unit is 
                licensed, authorized, or regulated by the 
                applicable insurance regulatory body to sell 
                insurance, reinsurance, or annuity contracts to 
                persons other than related persons (as defined 
                in section 954(d)(3)) in such country.
          (7) Anti-abuse rules.--For purposes of applying this 
        subsection and section 954(i)--
                  (A) the rules of section 954(h)(7) (other 
                than subparagraph (B) thereof) shall apply,
                  (B) there shall be disregarded any item of 
                income, gain, loss, or deduction of, or derived 
                from, an entity which is not engaged in regular 
                and continuous transactions with persons which 
                are not related persons,
                  (C) there shall be disregarded any change in 
                the method of computing reserves a principal 
                purpose of which is the acceleration or 
                deferral of any item in order to claim the 
                benefits of this subsection or section 954(i),
                  (D) a contract of insurance or reinsurance 
                shall not be treated as an exempt contract (and 
                premiums from such contract shall not be taken 
                into account for purposes of paragraph (2)(B) 
                or (3)) if--
                          (i) any policyholder, insured, 
                        annuitant, or beneficiary is a resident 
                        of the United States and such contract 
                        was marketed to such resident and was 
                        written to cover a risk outside the 
                        United States, or
                          (ii) the contract covers risks 
                        located within and without the United 
                        States and the qualifying insurance 
                        company or qualifying insurance company 
                        branch does not maintain such 
                        contemporaneous records, and file such 
                        reports, with respect to such contract 
                        as the Secretary may require,
                  (E) the Secretary may prescribe rules for the 
                allocation of contracts (and income from 
                contracts) among 2 or more qualifying insurance 
                company branches of a qualifying insurance 
                company in order to clearly reflect the income 
                of such branches, and
                  (F) premiums from a contract shall not be 
                taken into account for purposes of paragraph 
                (2)(B) or (3) if such contract reinsures a 
                contract issued or reinsured by a related 
                person (as defined in section 954(d)(3)). For 
                purposes of subparagraph (D), the determination 
                of where risks are located shall be made under 
                the principles of section 953.
          (8) Coordination with subsection (c).--In determining 
        insurance income for purposes of subsection (c), exempt 
        insurance income shall not include income derived from 
        exempt contracts which cover risks other than 
        applicable home country risks.
          (9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection and section 954(i).
          [(10) Application.--This subsection and section 
        954(i) shall apply only to taxable years of a foreign 
        corporation beginning after December 31, 1998, and 
        before January 1, 2015, and to taxable years of United 
        States shareholders with or within which any such 
        taxable year of such foreign corporation ends. If this 
        subsection does not apply to a taxable year of a 
        foreign corporation beginning after December 31, 2014 
        (and taxable years of United States shareholders ending 
        with or within such taxable year), then, 
        notwithstanding the preceding sentence, subsection (a) 
        shall be applied to such taxable years in the same 
        manner as it would if the taxable year of the foreign 
        corporation began in 1998.]
          [(11)] (10) Cross reference.--For income exempt from 
        foreign personal holding company income, see section 
        954(i).

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)),
          (3) the foreign base company services income for the 
        taxable year (determined under subsection (e) and 
        reduced as provided in subsection (b)(5)),
          (5) the foreign base company oil related income for 
        the taxable year (determined under subsection (g) and 
        reduced as provided in subsection (b)(5)).
  (b) Exclusion and Special Rules.--
          (3) De minimis, etc., rules.--For purposes of 
        subsection (a) and section 953--
                  (A) De minimis rule.--If the sum of foreign 
                base company income (determined without regard 
                to paragraph (5)) and the gross insurance 
                income for the taxable year is less than the 
                lesser of--
                          (i) 5 percent of gross income, or
                          (ii) $1,000,000, no part of the gross 
                        income for the taxable year shall be 
                        treated as foreign base company income 
                        or insurance income.
                  (B) Foreign base company income and insurance 
                income in excess of 70 percent of gross 
                income.--If the sum of the foreign base company 
                income (determined without regard to paragraph 
                (5)) and the gross insurance income for the 
                taxable year exceeds 70 percent of gross 
                income, the entire gross income for the taxable 
                year shall, subject to the provisions of 
                paragraphs (4) and (5), be treated as foreign 
                base company income or insurance income 
                (whichever is appropriate).
                  (C) Gross insurance income.--For purposes of 
                subparagraphs (A) and (B), the term ``gross 
                insurance income'' means any item of gross 
                income taken into account in determining 
                insurance income under section 953.
          (4) Exception for certain income subject to high 
        foreign taxes.--For purposes of subsection (a) and 
        section 953, foreign base company income and insurance 
        income shall not include any item of income received by 
        a controlled foreign corporation if the taxpayer 
        establishes to the satisfaction of the Secretary that 
        such income was subject to an effective rate of income 
        tax imposed by a foreign country greater than 90 
        percent of the maximum rate of tax specified in section 
        11. The preceding sentence shall not apply to foreign 
        base company oil-related income described in subsection 
        (a)(5).
          (5) Deductions to be taken into account.--For 
        purposes of subsection (a), the foreign personal 
        holding company income, the foreign base company sales 
        income, the foreign base company services income,, and 
        the foreign base company oil related income shall be 
        reduced, under regulations prescribed by the Secretary 
        so as to take into account deductions (including taxes) 
        properly allocable to such income. Except to the extent 
        provided in regulations prescribed by the Secretary, 
        any interest which is paid or accrued by the controlled 
        foreign corporation to any United States shareholder in 
        such corporation (or any controlled foreign corporation 
        related to such a shareholder) shall be allocated first 
        to foreign personal holding company income which is 
        passive income (within the meaning of section 
        904(d)(2)) of such corporation to the extent thereof. 
        The Secretary may, by regulations, provide that the 
        preceding sentence shall apply also to interest paid or 
        accrued to other persons.
          (6) Foreign base company oil related income not 
        treated as another kind of base company income.--Income 
        of a corporation which is foreign base company oil 
        related income shall not be considered foreign base 
        company income of such corporation under paragraph (2), 
        or (3) of subsection (a).
  (c) Foreign Personal Holding Company Income.--
          (1) In general.--For purposes of subsection (a)(1), 
        the term ``foreign personal holding company income'' 
        means the portion of the gross income which consists 
        of:
                  (A) Dividends, etc..--Dividends, interest, 
                royalties, rents, and annuities.
                  (B) Certain property transactions.--The 
                excess of gains over losses from the sale or 
                exchange of property--
                          (i) which gives rise to income 
                        described in subparagraph (A) (after 
                        application of paragraph (2)(A)) other 
                        than property which gives rise to 
                        income not treated as foreign personal 
                        holding company income by reason of 
                        subsection (h) or (i) for the taxable 
                        year,
                          (ii) which is an interest in a trust, 
                        partnership, or REMIC, or
                          (iii) which does not give rise to any 
                        income.
                Gains and losses from the sale or exchange of 
                any property which, in the hands of the 
                controlled foreign corporation, is property 
                described in section 1221(a)(1) shall not be 
                taken into account under this subparagraph.
                  (C) Commodities transactions.--The excess of 
                gains over losses from transactions (including 
                futures, forward, and similar transactions) in 
                any commodities. This subparagraph shall not 
                apply to gains or losses which--
                          (i) arise out of commodity hedging 
                        transactions (as defined in paragraph 
                        (5)(A)),
                          (ii) are active business gains or 
                        losses from the sale of commodities, 
                        but only if substantially all of the 
                        controlled foreign corporation's 
                        commodities are property described in 
                        paragraph (1), (2), or (8) of section 
                        1221(a), or
                          (iii) are foreign currency gains or 
                        losses (as defined in section 988(b)) 
                        attributable to any section 988 
                        transactions.
                  (D) Foreign currency gains.--The excess of 
                foreign currency gains over foreign currency 
                losses (as defined in section 988(b)) 
                attributable to any section 988 transactions. 
                This subparagraph shall not apply in the case 
                of any transaction directly related to the 
                business needs of the controlled foreign 
                corporation.
                  (E) Income equivalent to interest.--Any 
                income equivalent to interest, including income 
                from commitment fees (or similar amounts) for 
                loans actually made.
                  (F) Income from notional principal 
                contracts.--
                          (i) In general.--Net income from 
                        notional principal contracts.
                          (ii) Coordination with other 
                        categories of foreign personal holding 
                        company income.--Any item of income, 
                        gain, deduction, or loss from a 
                        notional principal contract entered 
                        into for purposes of hedging any item 
                        described in any preceding subparagraph 
                        shall not be taken into account for 
                        purposes of this subparagraph but shall 
                        be taken into account under such other 
                        subparagraph.
                  (G) Payments in lieu of dividends.--Payments 
                in lieu of dividends which are made pursuant to 
                an agreement to which section 1058 applies.
                  (H) Personal service contracts.--
                          (i) Amounts received under a contract 
                        under which the corporation is to 
                        furnish personal services if--
                                  (I) some person other than 
                                the corporation has the right 
                                to designate (by name or by 
                                description) the individual who 
                                is to perform the services, or
                                  (II) the individual who is to 
                                perform the services is 
                                designated (by name or by 
                                description) in the contract, 
                                and
                          (ii) amounts received from the sale 
                        or other disposition of such a 
                        contract.
                This subparagraph shall apply with respect to 
                amounts received for services under a 
                particular contract only if at some time during 
                the taxable year 25 percent or more in value of 
                the outstanding stock of the corporation is 
                owned, directly or indirectly, by or for the 
                individual who has performed, is to perform, or 
                may be designated (by name or by description) 
                as the one to perform, such services.
          (2) Exception for certain amounts.--
                  (A) Rents and royalties derived in active 
                business.--Foreign personal holding company 
                income shall not include 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)). For purposes of 
                the preceding sentence, rents derived from 
                leasing an aircraft or vessel in foreign 
                commerce shall not fail to be treated as 
                derived in the active conduct of a trade or 
                business if, as determined under regulations 
                prescribed by the Secretary, the active leasing 
                expenses are not less than 10 percent of the 
                profit on the lease.
                  (B) Certain export financing.--Foreign 
                personal holding company income shall not 
                include any interest which is derived in the 
                conduct of a banking business and which is 
                export financing interest (as defined in 
                section 904(d)(2)(G)).
                  (C) Exception for dealers.--Except as 
                provided by regulations, in the case of a 
                regular dealer in property which is property 
                described in paragraph (1)(B), forward 
                contracts, option contracts, or similar 
                financial instruments (including notional 
                principal contracts and all instruments 
                referenced to commodities), there shall not be 
                taken into account in computing foreign 
                personal holding company income--
                          (i) any item of income, gain, 
                        deduction, or loss (other than any item 
                        described in subparagraph (A), (E), or 
                        (G) of paragraph (1)) from any 
                        transaction (including hedging 
                        transactions and transactions involving 
                        physical settlement) entered into in 
                        the ordinary course of such dealer's 
                        trade or business as such a dealer, and
                          (ii) if such dealer is a dealer in 
                        securities (within the meaning of 
                        section 475), any interest or dividend 
                        or equivalent amount described in 
                        subparagraph (E) or (G) of paragraph 
                        (1) from any transaction (including any 
                        hedging transaction or transaction 
                        described in section 956(c)(2)(I)) 
                        entered into in the ordinary course of 
                        such dealer's trade or business as such 
                        a dealer in securities, but only if the 
                        income from the transaction is 
                        attributable to activities of the 
                        dealer in the country under the laws of 
                        which the dealer is created or 
                        organized (or in the case of a 
                        qualified business unit described in 
                        section 989(a), is attributable to 
                        activities of the unit in the country 
                        in which the unit both maintains its 
                        principal office and conducts 
                        substantial business activity).
          (3) Certain income received from related persons.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the term ``foreign personal 
                holding company income'' does not include--
                          (i) dividends and interest received 
                        from a related person which (I) is a 
                        corporation 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, and
                          (ii) rents and royalties received 
                        from a corporation which is 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.
                To the extent provided in regulations, payments 
                made by a partnership with 1 or more corporate 
                partners shall be treated as made by such 
                corporate partners in proportion to their 
                respective interests in the partnership.
                  (B) Exception not to apply to items which 
                reduce subpart F income.--Subparagraph (A) 
                shall not apply in the case of any interest, 
                rent, or royalty to the extent such interest, 
                rent, or royalty reduces the payor's subpart F 
                income or creates (or increases) a deficit 
                which under section 952(c) may reduce the 
                subpart F income of the payor or another 
                controlled foreign corporation.
                  (C) Exception for certain dividends.--
                Subparagraph (A)(i) shall not apply to any 
                dividend with respect to any stock which is 
                attributable to earnings and profits of the 
                distributing corporation accumulated during any 
                period during which the person receiving such 
                dividend did not hold such stock either 
                directly, or indirectly through a chain of one 
                or more subsidiaries each of which meets the 
                requirements of subparagraph (A)(i).
          (4) Look-thru rule for certain partnership sales.--
                  (A) In general.--In the case of any sale by a 
                controlled foreign corporation of an interest 
                in a partnership with respect to which such 
                corporation is a 25-percent owner, such 
                corporation shall be treated for purposes of 
                this subsection as selling the proportionate 
                share of the assets of the partnership 
                attributable to such interest. The Secretary 
                shall prescribe such regulations as may be 
                appropriate to prevent abuse of the purposes of 
                this paragraph, including regulations providing 
                for coordination of this paragraph with the 
                provisions of subchapter K.
                  (B) 25-percent owner.--For purposes of this 
                paragraph, the term ``25-percent owner'' means 
                a controlled foreign corporation which owns 
                directly 25 percent or more of the capital or 
                profits interest in a partnership. For purposes 
                of the preceding sentence, if a controlled 
                foreign corporation is a shareholder or partner 
                of a corporation or partnership, the controlled 
                foreign corporation shall be treated as owning 
                directly its proportionate share of any such 
                capital or profits interest held directly or 
                indirectly by such corporation or partnership. 
                If a controlled foreign corporation is treated 
                as owning a capital or profits interest in a 
                partnership under constructive ownership rules 
                similar to the rules of section 958(b), the 
                controlled foreign corporation shall be treated 
                as owning such interest directly for purposes 
                of this subparagraph.
          (5) Definition and special rules relating to 
        commodity transactions.--
                  (A) Commodity hedging transactions.--For 
                purposes of paragraph (1)(C)(i), the term 
                ``commodity hedging transaction'' means any 
                transaction with respect to a commodity if such 
                transaction--
                          (i) is a hedging transaction as 
                        defined in section 1221(b)(2), 
                        determined--
                                  (I) without regard to 
                                subparagraph (A)(ii) thereof,
                                  (II) by applying subparagraph 
                                (A)(i) thereof by substituting 
                                ``ordinary property or property 
                                described in section 1231(b)'' 
                                for ``ordinary property'', and
                                  (III) by substituting 
                                ``controlled foreign 
                                corporation'' for ``taxpayer'' 
                                each place it appears, and
                          (ii) is clearly identified as such in 
                        accordance with section 1221(a)(7).
                  (B) Treatment of dealer activities under 
                paragraph (1)(C).--Commodities with respect to 
                which gains and losses are not taken into 
                account under paragraph (2)(C) in computing a 
                controlled foreign corporation's foreign 
                personal holding company income shall not be 
                taken into account in applying the 
                substantially all test under paragraph 
                (1)(C)(ii) to such corporation.
                  (C) Regulations.--The Secretary shall 
                prescribe such regulations as are appropriate 
                to carry out the purposes of paragraph (1)(C) 
                in the case of transactions involving related 
                parties.
          (6) Look-thru rule for related controlled foreign 
        corporations.--
                  (A) In general.--For purposes of this 
                subsection, dividends, interest, rents, and 
                royalties received or accrued from a controlled 
                foreign corporation which is a related person 
                shall not be treated as foreign personal 
                holding company income to the extent 
                attributable or properly allocable (determined 
                under rules similar to the rules of 
                subparagraphs (C) and (D) of section 904(d)(3)) 
                to income of the related person which is 
                neither subpart F income nor income treated as 
                effectively connected with the conduct of a 
                trade or business in the United States. For 
                purposes of this subparagraph, interest shall 
                include factoring income which is treated as 
                income equivalent to interest for purposes of 
                paragraph (1)(E). The Secretary shall prescribe 
                such regulations as may be necessary or 
                appropriate to carry out this paragraph, 
                including such regulations as may be necessary 
                or appropriate to prevent the abuse of the 
                purposes of this paragraph.
                  (B) Exception.--Subparagraph (A) shall not 
                apply in the case of any interest, rent, or 
                royalty to the extent such interest, rent, or 
                royalty creates (or increases) a deficit which 
                under section 952(c) may reduce the subpart F 
                income of the payor or another controlled 
                foreign corporation.
                  (C) Application.--Subparagraph (A) shall 
                apply to taxable years of foreign corporations 
                beginning after December 31, 2005, and before 
                January 1, 2015, and to taxable years of United 
                States shareholders with or within which such 
                taxable years of foreign corporations end.
  (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.
        For purposes of this subsection, personal property does 
        not include agricultural commodities which are not 
        grown in the United States in commercially marketable 
        quantities.
          (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 a wholly owned subsidiary 
        corporation deriving such income, under regulations 
        prescribed by the Secretary 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, 
                corporation, partnership, trust, or estate 
                which controls, or is controlled by, the 
                controlled foreign corporation, or
                  (B) such person is a corporation, 
                partnership, trust, or estate which is 
                controlled by the same person or persons which 
                control the controlled foreign corporation.
        For purposes of the preceding sentence, control means, 
        with respect to a corporation, the ownership, directly 
        or indirectly, of stock possessing more than 50 percent 
        of the total voting power of all classes of stock 
        entitled to vote or of the total value of stock of such 
        corporation. In the case of a partnership, trust, or 
        estate, control means the ownership, directly or 
        indirectly, of more than 50 percent (by value) of the 
        beneficial interests in such partnership, trust, or 
        estate. For purposes of this paragraph, rules similar 
        to the rules of section 958 shall apply.
          (4) Special rule for certain timber products.--For 
        purposes of subsection (a)(2), the term ``foreign base 
        company sales income'' includes any income (whether in 
        the form of profits, commissions, fees, or otherwise) 
        derived in connection with--
                  (A) the sale of any unprocessed timber 
                referred to in section 865(b), or
                  (B) the milling of any such timber outside 
                the United States.
        Subpart G shall not apply to any amount treated as 
        subpart F income by reason of this paragraph.
  (e) Foreign Base Company Services Income.--
          (1) In general.--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--
                  (A) are performed for or on behalf of any 
                related person (within the meaning of 
                subsection (d)(3)), and
                  (B) are performed outside the country under 
                the laws of which the controlled foreign 
                corporation is created or organized.
          (2) Exception.--Paragraph (1) shall not apply to 
        income derived in connection with the performance of 
        services which are directly related to--
                  (A) the sale or exchange by the controlled 
                foreign corporation of property manufactured, 
                produced, grown, or extracted by it and which 
                are performed before the time of the sale or 
                exchange, or
                  (B) an offer or effort to sell or exchange 
                such property.
        Paragraph (1) shall also not apply to income which is 
        exempt insurance income (as defined in section 953(e)) 
        or which is not treated as foreign personal holding 
        income by reason of subsection (c)(2)(C)(ii), (h), or 
        (i).
  (g) Foreign Base Company Oil Related Income.--For purposes of 
this section--
          (1) In general.--Except as otherwise provided in this 
        subsection, the term ``foreign base company oil related 
        income'' means foreign oil related income (within the 
        meaning of paragraphs (2) and (3) of section 907(c)) 
        other than income derived from a source within a 
        foreign country in connection with--
                  (A) oil or gas which was extracted from an 
                oil or gas well located in such foreign 
                country, or
                  (B) oil, gas, or a primary product of oil or 
                gas which is sold by the foreign corporation or 
                a related person for use or consumption within 
                such country or is loaded in such country on a 
                vessel or aircraft as fuel for such vessel or 
                aircraft.
        Such term shall not include any foreign personal 
        holding company income (as defined in subsection (c)).
          (2) Paragraph (1) applies only where corporation has 
        produced 1,000 barrels per day or more.--
                  (A) In general.--The term ``foreign base 
                company oil related income'' shall not include 
                any income of a foreign corporation if such 
                corporation is not a large oil producer for the 
                taxable year.
                  (B) Large oil producer.--For purposes of 
                subparagraph (A), the term ``large oil 
                producer'' means any corporation if, for the 
                taxable year or for the preceding taxable year, 
                the average daily production of foreign crude 
                oil and natural gas of the related group which 
                includes such corporation equaled or exceeded 
                1,000 barrels.
                  (C) Related group.--The term ``related 
                group'' means a group consisting of the foreign 
                corporation and any other person who is a 
                related person with respect to such 
                corporation.
                  (D) Average daily production of foreign crude 
                oil and natural gas.--For purposes of this 
                paragraph, the average daily production of 
                foreign crude oil or natural gas of any related 
                group for any taxable year (and the conversion 
                of cubic feet of natural gas into barrels) 
                shall be determined under rules similar to the 
                rules of section 613A except that only crude 
                oil or natural gas from a well located outside 
                the United States shall be taken into account.
  (h) Special Rule for Income Derived in the Active Conduct of 
Banking, Financing, or Similar Businesses.--
          (1) In general.--For purposes of subsection (c)(1), 
        foreign personal holding company income shall not 
        include qualified banking or financing income of an 
        eligible controlled foreign corporation.
          (2) Eligible controlled foreign corporation.--For 
        purposes of this subsection--
                  (A) In general.--The term ``eligible 
                controlled foreign corporation'' means a 
                controlled foreign corporation which--
                          (i) is predominantly engaged in the 
                        active conduct of a banking, financing, 
                        or similar business, and
                          (ii) conducts substantial activity 
                        with respect to such business.
                  (B) Predominantly engaged.--A controlled 
                foreign corporation shall be treated as 
                predominantly engaged in the active conduct of 
                a banking, financing, or similar business if--
                          (i) more than 70 percent of the gross 
                        income of the controlled foreign 
                        corporation is derived directly from 
                        the active and regular conduct of a 
                        lending or finance business from 
                        transactions with customers which are 
                        not related persons,
                          (ii) it is engaged in the active 
                        conduct of a banking business and is an 
                        institution licensed to do business as 
                        a bank in the United States (or is any 
                        other corporation not so licensed which 
                        is specified by the Secretary in 
                        regulations), or
                          (iii) it is engaged in the active 
                        conduct of a securities business and is 
                        registered as a securities broker or 
                        dealer under section 15(a) of the 
                        Securities Exchange Act of 1934 or is 
                        registered as a Government securities 
                        broker or dealer under section 15C(a) 
                        of such Act (or is any other 
                        corporation not so registered which is 
                        specified by the Secretary in 
                        regulations).
          (3) Qualified banking or financing income.--For 
        purposes of this subsection--
                  (A) In general.--The term ``qualified banking 
                or financing income'' means income of an 
                eligible controlled foreign corporation which--
                          (i) is derived in the active conduct 
                        of a banking, financing, or similar 
                        business by--
                                  (I) such eligible controlled 
                                foreign corporation, or
                                  (II) a qualified business 
                                unit of such eligible 
                                controlled foreign corporation,
                          (ii) is derived from one or more 
                        transactions--
                                  (I) with customers located in 
                                a country other than the United 
                                States, and
                                  (II) substantially all of the 
                                activities in connection with 
                                which are conducted directly by 
                                the corporation or unit in its 
                                home country, and
                          (iii) is treated as earned by such 
                        corporation or unit in its home country 
                        for purposes of such country's tax 
                        laws.
                  (B) Limitation on nonbanking and 
                nonsecurities businesses.--No income of an 
                eligible controlled foreign corporation not 
                described in clause (ii) or (iii) of paragraph 
                (2)(B) (or of a qualified business unit of such 
                corporation) shall be treated as qualified 
                banking or financing income unless more than 30 
                percent of such corporation's or unit's gross 
                income is derived directly from the active and 
                regular conduct of a lending or finance 
                business from transactions with customers which 
                are not related persons and which are located 
                within such corporation's or unit's home 
                country.
                  (C) Substantial activity requirement for 
                cross border income.--The term ``qualified 
                banking or financing income'' shall not include 
                income derived from 1 or more transactions with 
                customers located in a country other than the 
                home country of the eligible controlled foreign 
                corporation or a qualified business unit of 
                such corporation unless such corporation or 
                unit conducts substantial activity with respect 
                to a banking, financing, or similar business in 
                its home country.
                  (D) Determinations made separately.--For 
                purposes of this paragraph, the qualified 
                banking or financing income of an eligible 
                controlled foreign corporation and each 
                qualified business unit of such corporation 
                shall be determined separately for such 
                corporation and each such unit by taking into 
                account--
                          (i) in the case of the eligible 
                        controlled foreign corporation, only 
                        items of income, deduction, gain, or 
                        loss and activities of such corporation 
                        not properly allocable or attributable 
                        to any qualified business unit of such 
                        corporation, and
                          (ii) in the case of a qualified 
                        business unit, only items of income, 
                        deduction, gain, or loss and activities 
                        properly allocable or attributable to 
                        such unit.
                  (E) Direct conduct of activities.--For 
                purposes of subparagraph (A)(ii)(II), an 
                activity shall be treated as conducted directly 
                by an eligible controlled foreign corporation 
                or qualified business unit in its home country 
                if the activity is performed by employees of a 
                related person and--
                          (i) the related person is an eligible 
                        controlled foreign corporation the home 
                        country of which is the same as the 
                        home country of the corporation or unit 
                        to which subparagraph (A)(ii)(II) is 
                        being applied,
                          (ii) the activity is performed in the 
                        home country of the related person, and
                          (iii) the related person is 
                        compensated on an arm's- length basis 
                        for the performance of the activity by 
                        its employees and such compensation is 
                        treated as earned by such person in its 
                        home country for purposes of the home 
                        country's tax laws.
          (4) Lending or finance business.--For purposes of 
        this subsection, the term ``lending or finance 
        business'' means the business of--
                  (A) making loans,
                  (B) purchasing or discounting accounts 
                receivable, notes, or installment obligations,
                  (C) engaging in leasing (including entering 
                into leases and purchasing, servicing, and 
                disposing of leases and leased assets),
                  (D) issuing letters of credit or providing 
                guarantees,
                  (E) providing charge and credit card 
                services, or
                  (F) rendering services or making facilities 
                available in connection with activities 
                described in subparagraphs (A) through (E) 
                carried on by--
                          (i) the corporation (or qualified 
                        business unit) rendering services or 
                        making facilities available, or
                          (ii) another corporation (or 
                        qualified business unit of a 
                        corporation) which is a member of the 
                        same affiliated group (as defined in 
                        section 1504, but determined without 
                        regard to section 1504(b)(3)).
          (5) Other definitions.--For purposes of this 
        subsection--
                  (A) Customer.--The term ``customer'' means, 
                with respect to any controlled foreign 
                corporation or qualified business unit, any 
                person which has a customer relationship with 
                such corporation or unit and which is acting in 
                its capacity as such.
                  (B) Home country.--Except as provided in 
                regulations--
                          (i) Controlled foreign corporation.--
                        The term ``home country'' means, with 
                        respect to any controlled foreign 
                        corporation, the country under the laws 
                        of which the corporation was created or 
                        organized.
                          (ii) Qualified business unit.--The 
                        term ``home country'' means, with 
                        respect to any qualified business unit, 
                        the country in which such unit 
                        maintains its principal office.
                  (C) Located.--The determination of where a 
                customer is located shall be made under rules 
                prescribed by the Secretary.
                  (D) Qualified business unit.--The term 
                ``qualified business unit'' has the meaning 
                given such term by section 989(a).
                  (E) Related person.--The term ``related 
                person'' has the meaning given such term by 
                subsection (d)(3).
          (6) Coordination with exception for dealers.--
        Paragraph (1) shall not apply to income described in 
        subsection (c)(2)(C)(ii) of a dealer in securities 
        (within the meaning of section 475) which is an 
        eligible controlled foreign corporation described in 
        paragraph (2)(B)(iii).
          (7) Anti-abuse rules.--For purposes of applying this 
        subsection and subsection (c)(2)(C)(ii)--
                  (A) there shall be disregarded any item of 
                income, gain, loss, or deduction with respect 
                to any transaction or series of transactions 
                one of the principal purposes of which is 
                qualifying income or gain for the exclusion 
                under this section, including any transaction 
                or series of transactions a principal purpose 
                of which is the acceleration or deferral of any 
                item in order to claim the benefits of such 
                exclusion through the application of this 
                subsection,
                  (B) there shall be disregarded any item of 
                income, gain, loss, or deduction of an entity 
                which is not engaged in regular and continuous 
                transactions with customers which are not 
                related persons,
                  (C) there shall be disregarded any item of 
                income, gain, loss, or deduction with respect 
                to any transaction or series of transactions 
                utilizing, or doing business with--
                          (i) one or more entities in order to 
                        satisfy any home country requirement 
                        under this subsection, or
                          (ii) a special purpose entity or 
                        arrangement, including a 
                        securitization, financing, or similar 
                        entity or arrangement,
                if one of the principal purposes of such 
                transaction or series of transactions is 
                qualifying income or gain for the exclusion 
                under this subsection, and
                  (D) a related person, an officer, a director, 
                or an employee with respect to any controlled 
                foreign corporation (or qualified business 
                unit) which would otherwise be treated as a 
                customer of such corporation or unit with 
                respect to any transaction shall not be so 
                treated if a principal purpose of such 
                transaction is to satisfy any requirement of 
                this subsection.
          (8) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection, subsection 
        (c)(1)(B)(i), subsection (c)(2)(C)(ii), and the last 
        sentence of subsection (e)(2).
          [(9) Application.--This subsection, subsection 
        (c)(2)(C)(ii), and the last sentence of subsection 
        (e)(2) shall apply only to taxable years of a foreign 
        corporation beginning after December 31, 1998, and 
        before January 1, 2015, and to taxable years of United 
        States shareholders with or within which any such 
        taxable year of such foreign corporation ends.]
  (i) Special Rule for Income Derived in the Active Conduct of 
Insurance Business.--
          (1) In general.--For purposes of subsection (c)(1), 
        foreign personal holding company income shall not 
        include qualified insurance income of a qualifying 
        insurance company.
          (2) Qualified insurance income.--The term ``qualified 
        insurance income'' means income of a qualifying 
        insurance company which is--
                  (A) received from a person other than a 
                related person (within the meaning of 
                subsection (d)(3)) and derived from the 
                investments made by a qualifying insurance 
                company or a qualifying insurance company 
                branch of its reserves allocable to exempt 
                contracts or of 80 percent of its unearned 
                premiums from exempt contracts (as both are 
                determined in the manner prescribed under 
                paragraph (4)), or
                  (B) received from a person other than a 
                related person (within the meaning of 
                subsection (d)(3)) and derived from investments 
                made by a qualifying insurance company or a 
                qualifying insurance company branch of an 
                amount of its assets allocable to exempt 
                contracts equal to--
                          (i) in the case of property, 
                        casualty, or health insurance 
                        contracts, one-third of its premiums 
                        earned on such insurance contracts 
                        during the taxable year (as defined in 
                        section 832(b)(4)), and
                          (ii) in the case of life insurance or 
                        annuity contracts, 10 percent of the 
                        reserves described in subparagraph (A) 
                        for such contracts.
          (3) Principles for determining insurance income.--
        Except as provided by the Secretary, for purposes of 
        subparagraphs (A) and (B) of paragraph (2)--
                  (A) in the case of any contract which is a 
                separate account-type contract (including any 
                variable contract not meeting the requirements 
                of section 817), income credited under such 
                contract shall be allocable only to such 
                contract, and
                  (B) income not allocable under subparagraph 
                (A) shall be allocated ratably among contracts 
                not described in subparagraph (A).
          (4) Methods for determining unearned premiums and 
        reserves.--For purposes of paragraph (2)(A)--
                  (A) Property and casualty contracts.--The 
                unearned premiums and reserves of a qualifying 
                insurance company or a qualifying insurance 
                company branch with respect to property, 
                casualty, or health insurance contracts shall 
                be determined using the same methods and 
                interest rates which would be used if such 
                company or branch were subject to tax under 
                subchapter L, except that--
                          (i) the interest rate determined for 
                        the functional currency of the company 
                        or branch, and which, except as 
                        provided by the Secretary, is 
                        calculated in the same manner as the 
                        Federal mid-term rate under section 
                        1274(d), shall be substituted for the 
                        applicable Federal interest rate, and
                          (ii) such company or branch shall use 
                        the appropriate foreign loss payment 
                        pattern.
                  (B) Life insurance and annuity contracts.--
                          (i) In general.--Except as provided 
                        in clause (ii), the amount of the 
                        reserve of a qualifying insurance 
                        company or qualifying insurance company 
                        branch for any life insurance or 
                        annuity contract shall be equal to the 
                        greater of--
                                  (I) the net surrender value 
                                of such contract (as defined in 
                                section 807(e)(1)(A)), or
                                  (II) the reserve determined 
                                under paragraph (5).
                          (ii) Ruling request, etc.--The amount 
                        of the reserve under clause (i) shall 
                        be the foreign statement reserve for 
                        the contract (less any catastrophe, 
                        deficiency, equalization, or similar 
                        reserves), if, pursuant to a ruling 
                        request submitted by the taxpayer or as 
                        provided in published guidance, the 
                        Secretary determines that the factors 
                        taken into account in determining the 
                        foreign statement reserve provide an 
                        appropriate means of measuring income.
                  (C) Limitation on reserves.--In no event 
                shall the reserve determined under this 
                paragraph for any contract as of any time 
                exceed the amount which would be taken into 
                account with respect to such contract as of 
                such time in determining foreign statement 
                reserves (less any catastrophe, deficiency, 
                equalization, or similar reserves).
          (5) Amount of reserve.--The amount of the reserve 
        determined under this paragraph with respect to any 
        contract shall be determined in the same manner as it 
        would be determined if the qualifying insurance company 
        or qualifying insurance company branch were subject to 
        tax under subchapter L, except that in applying such 
        subchapter--
                  (A) the interest rate determined for the 
                functional currency of the company or branch, 
                and which, except as provided by the Secretary, 
                is calculated in the same manner as the Federal 
                mid-term rate under section 1274(d), shall be 
                substituted for the applicable Federal interest 
                rate,
                  (B) the highest assumed interest rate 
                permitted to be used in determining foreign 
                statement reserves shall be substituted for the 
                prevailing State assumed interest rate, and
                  (C) tables for mortality and morbidity which 
                reasonably reflect the current mortality and 
                morbidity risks in the company's or branch's 
                home country shall be substituted for the 
                mortality and morbidity tables otherwise used 
                for such subchapter.
        The Secretary may provide that the interest rate and 
        mortality and morbidity tables of a qualifying 
        insurance company may be used for 1 or more of its 
        qualifying insurance company branches when appropriate.
          (6) Definitions.--For purposes of this subsection, 
        any term used in this subsection which is also used in 
        section 953(e) shall have the meaning given such term 
        by section 953.

           *       *       *       *       *       *       *

                         VII. DISSENTING VIEWS

    The five permanent, unpaid-for tax extender bills approved 
by the Republicans at the markup would add more than $411 
billion to the deficit. Combined with the eleven tax bills that 
were approved by the Republicans in previous markups this 
Congress, these sixteen tax bills would add more than $1 
trillion to the deficit. In the 113th Congress, Ways and Means 
Committee Republicans selectively approved fourteen of the more 
than fifty expired tax provisions, totaling more than $825 
billion worth of deficit-financed, permanent tax cuts. This 
selective approach failed last Congress, with none of these 
permanent provisions being enacted into law or even considered 
by the Senate. The permanent, unpaid-for bills marked up by the 
Committee set us down a partisan path, when we should be 
working in a responsible, bipartisan manner on tax reform.
    Even though a number of these bills were introduced 
individually with some bipartisan support, our opposition to 
these bills is based on the position that these tax provisions 
should not be made permanent without any revenue offset. The 
fiscally irresponsible approach that the Committee Republicans 
are taking with respect to this and other legislation 
undermines the bipartisan support that some of the provisions 
enjoy. The cost of making this provision permanent should be 
offset, and Republicans should stop playing games by passing 
these provisions outside of comprehensive tax reform. The 
American people expect a tax code that maintains and supports 
our shared priorities, and each time the Committee considers 
these bills in a piecemeal approach, it is taking a step in the 
wrong direction and away from comprehensive tax reform.
    Expired provisions must be dealt with in a comprehensive 
manner. The Republicans did not take up other tax extenders 
that also are important to Democratic Committee Members. Left 
to an uncertain fate are provisions like the Work Opportunity 
Tax Credit, the New Markets Tax Credit, and the renewable 
energy tax credits, as well as the long-term status of the 
Earned Income Tax Credit, the Child Tax Credit, and the 
American Opportunity Tax Credit.
            Sincerely,
                                           Sander M. Levin,
                                                    Ranking Member.
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