‘‘(ii) in the case of a qualified busi-
ness unit, only activities and items of in-
come, deduction, gain, or loss and activities 
properly allocable or attributable to such 
unit shall be taken into account. 
‘‘(C) HOME
COUNTRY.—For purposes of 
this subsection, except as provided in regula-
tions, notwithstanding paragraph (5)(B), the 
home country with respect to any qualified 
business unit treated as a controlled foreign 
corporation under subparagraph (A) shall be 
the country in which such unit maintains its 
principal office. 
‘‘(7) ANTI-ABUSE RULES.—For purposes of ap-
plying this subsection— 
‘‘(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 in-
come or gain for the exclusion under this sec-
tion, 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, 
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‘‘(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 re-
lated persons, 
‘‘(C) there shall be disregarded any item of 
income, gain, loss, or deduction with respect to 
any transaction or series of transactions uti-
lizing, 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 ar-
rangement, including a securitization, fi-
nancing, or similar entity or arrangement, 
if one of the principal purposes of such trans-
action or series of transactions is qualifying in-
come or gain for the exclusion under this sub-
section, and 
‘‘(D) a related person, an officer, a direc-
tor, or an employee with respect to any con-
trolled foreign corporation which would other-
wise be treated as a customer of such corpora-
tion with respect to any transaction shall not be 
so treated if a principal purpose of such trans-
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action is to satisfy any requirement of this sub-
section. 
‘‘(8) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section and subsection (a)(1)(B)(i). 
‘‘(d) SPECIAL RULE FOR INCOME DERIVED IN THE 
ACTIVE CONDUCT OF INSURANCE BUSINESS.— 
‘‘(1) IN GENERAL.—For purposes of subsection 
(a)(1), passive income shall not include qualified in-
surance income of a qualifying insurance company. 
‘‘(2) QUALIFIED
INSURANCE
INCOME.—For 
purposes of this subsection, the term ‘qualified in-
surance income’ means income of a qualifying insur-
ance company which is— 
‘‘(A) received from a person other than a 
related person and derived from the invest-
ments 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 man-
ner prescribed under paragraph (4)), or 
‘‘(B) received from a person other than a 
related person and derived from investments 
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made by a qualifying insurance company or a 
qualifying insurance company branch of an 
amount of its assets allocable to exempt con-
tracts 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 de-
fined in section 832(b)(4)), and 
‘‘(ii) in the case of life insurance or 
annuity contracts, 10 percent of the re-
serves described in subparagraph (A) for 
such contracts. 
‘‘(3) PRINCIPLES
FOR
DETERMINING
QUALI-
FIED 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 
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‘‘(B) income not allocable under subpara-
graph (A) shall be allocated ratably among con-
tracts not described in subparagraph (A). 
‘‘(4) METHODS FOR DETERMINING UNEARNED 
PREMIUMS AND RESERVES.—For purposes of para-
graph (2)(A)— 
‘‘(A) PROPERTY
AND
CASUALTY
CON-
TRACTS.—The unearned premiums and reserves 
of a qualifying insurance company or a quali-
fying insurance company branch with respect to 
property, casualty, or health insurance con-
tracts shall be determined using the same meth-
ods 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 
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‘‘(ii) such company or branch shall 
use the appropriate foreign loss payment 
pattern. 
‘‘(B) LIFE INSURANCE AND ANNUITY CON-
TRACTS.— 
‘‘(i) IN
GENERAL.—Except as pro-
vided in clause (ii), the amount of the re-
serve 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, defi-
ciency, 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 deter-
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mining the foreign statement reserve pro-
vide 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 ex-
ceed the amount which would be taken into ac-
count 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 quali-
fying insurance company or qualifying insurance 
company branch were subject to tax under sub-
chapter L, except that in applying such sub-
chapter— 
‘‘(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 
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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 appro-
priate. 
‘‘(6) DEFINITIONS.—For purposes of this sec-
tion, any term used in this subsection which is also 
used in section 955(c) shall have the meaning given 
such term under section 955(c). 
‘‘SEC. 955. DEFINITION OF INSURANCE INCOME. 
‘‘(a) INSURANCE INCOME.— 
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‘‘(1) IN
GENERAL.—For purposes of section 
953(c), the term ‘insurance income’ means the gross 
income which— 
‘‘(A) is attributable to the issuing (or rein-
suring) of an insurance or annuity contract, 
and 
‘‘(B) is of a kind that would be subject to 
tax 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 sub-
section (c)). 
‘‘(b) SPECIAL
RULES
FOR
DETERMINATION
OF 
GROSS INCOME
AND ALLOCABLE DEDUCTIONS.—For 
purposes of determining gross income under subsection (a) 
and deductions allocable to insurance income under sec-
tion 952(e), the following rules shall apply: 
‘‘(1) CERTAIN DEDUCTIONS NOT ALLOWED.— 
The following provisions of subchapter L shall not 
apply: 
‘‘(A) The small life insurance company de-
duction. 
‘‘(B) Section 805(a)(5) (relating to oper-
ations loss deduction). 
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‘‘(C) Section 832(c)(5) (relating to certain 
capital losses). 
‘‘(2) SPECIAL RULES FOR AMOUNTS INCLUDED 
IN INCOME.—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 de-
crease in reserves), 
‘‘(C) section 805(a)(2) (relating to net in-
crease in reserves), and 
‘‘(D) section 832(b)(4) (relating to pre-
miums 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 sub-
section (a)(1). 
‘‘(3) TREATMENT OF RESERVES.—Reserves for 
any insurance or annuity contract shall be deter-
mined in the same manner as under section 954(d). 
‘‘(c) EXEMPT INSURANCE INCOME.—For purposes of 
this section— 
‘‘(1) EXEMPT INSURANCE INCOME DEFINED.— 
‘‘(A) IN GENERAL.—The term ‘exempt in-
surance income’ means income derived by a 
qualifying insurance company which— 
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‘‘(i) is attributable to the issuing (or 
reinsuring) of an exempt contract by such 
company or a qualifying insurance com-
pany branch of such company, and 
‘‘(ii) is treated as earned by such com-
pany or branch in its home country for 
purposes of such country’s tax laws. 
‘‘(B) EXCEPTION FOR CERTAIN ARRANGE-
MENTS.—Such term shall not include income 
attributable to the issuing (or reinsuring) of an 
exempt contract as the result of any arrange-
ment whereby another corporation receives a 
substantially equal amount of premiums or 
other consideration in respect of issuing (or re-
insuring) a contract which is not an exempt 
contract. 
‘‘(C) 
DETERMINATIONS
MADE
SEPA-
RATELY.—For purposes of this subsection and 
section 954(d), 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— 
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‘‘(i) in the case of the qualifying in-
surance company, only items of income, de-
duction, gain, or loss, and activities of such 
company not properly allocable or attrib-
utable to any qualifying insurance com-
pany branch of such company, and 
‘‘(ii) in the case of a qualifying insur-
ance company branch, only items of in-
come, 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 con-
tract issued or reinsured by a qualifying insur-
ance 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 NON-RELATED INCOME RE-
QUIRED.—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 
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than 30 percent of its net written premiums 
from exempt contracts (determined without re-
gard to this subparagraph) with respect to 
which no policyholder, insured, annuitant, or 
beneficiary is a related person (as defined in 
section 954(b)). 
‘‘(C) SUBSTANTIAL
ACTIVITY
REQUIRE-
MENTS.—A contract issued by a qualifying in-
surance company or qualifying insurance com-
pany branch 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.— 
‘‘(A) IN GENERAL.—The term ‘qualifying 
insurance company’ means any controlled for-
eign corporation— 
‘‘(i) which— 
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‘‘(I) is subject to regulation as an 
insurance (or reinsurance) company 
by its home country, and is licensed, 
authorized, or regulated by the appli-
cable insurance regulatory body for its 
home country to sell insurance, rein-
surance, or annuity contracts to per-
sons other than related persons (with-
in the meaning of section 954(b)) in 
such home country, and 
‘‘(II) is engaged in the insurance 
business and would be subject to tax 
under subchapter L if it were a do-
mestic corporation, 
‘‘(ii) which derives more than 50 per-
cent 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 with respect to which no pol-
icyholder, insured, annuitant, or bene-
ficiary is a related person (as defined in 
section 954(b)), except that in the case of 
a branch, such premiums shall only be 
taken into account to the extent such pre-
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miums are treated as earned by such 
branch in its home country for purposes of 
such country’s tax laws, 
‘‘(iii) more than 50 percent of the 
gross receipts of which for the taxable 
year— 
‘‘(I) consist of premiums for in-
surance or reinsurance in connection 
with property, liability, or the lives or 
health of individuals, and 
‘‘(II) are treated as earned by 
such controlled foreign corporation in 
its home country for purposes of such 
country’s tax laws, and 
‘‘(iv) the applicable insurance liabil-
ities of which constitute more than 35 per-
cent of its total assets as reported on the 
company’s applicable financial statement 
for the year with which or in which the 
taxable year ends. 
‘‘(B) APPLICABLE
INSURANCE
LIABIL-
ITIES.—For purposes of subparagraph (A)(iv), 
the 
term 
‘applicable 
insurance 
liabilities’ 
means— 
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‘‘(i) loss and loss adjustment ex-
penses, 
‘‘(ii) unearned premiums, and 
‘‘(iii) reserves (other than any catas-
trophe, deficiency, equalization, or similar 
reserves) for life and health insurance risks 
and life and health insurance claims with 
respect to contracts providing coverage for 
mortality or morbidity risks (not to exceed 
the amount of such reserve that is required 
to be reported to the home country insur-
ance regulatory body). 
‘‘(C) 
APPLICABLE
FINANCIAL
STATE-
MENT.—For purposes of subparagraph (A)(iv), 
the term ‘applicable financial statement’ means 
a statement for financial reporting purposes 
which— 
‘‘(i) is made on the basis of generally 
accepted accounting principles, 
‘‘(ii) is made on the basis of inter-
national financial reporting standards, but 
only if there is no statement that meets 
the requirement of clause (i), or 
‘‘(iii) except as otherwise provided by 
the Secretary in regulations, is the annual 
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statement which is required to be filed 
with the home country insurance regu-
latory body, but only if there is no state-
ment which meets the requirements of 
clause (i) or (ii). 
‘‘(D) REGULATIONS.—The Secretary shall 
prescribe such regulations as necessary to carry 
out the purposes of this paragraph. 
‘‘(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, re-
insurance, or annuity contracts to persons other 
than related persons (within the meaning of 
section 954(b)) 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
CON-
TRACT.—For purposes of this section and section 
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954, the determination of whether a contract issued 
by a controlled foreign corporation or a qualifying 
insurance company branch is a life insurance con-
tract 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 in-
surance or annuity contract by the corpora-
tion’s or branch’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
CORPORA-
TION.—The term ‘home country’ means, with 
respect to a controlled foreign corporation, the 
country in which such corporation is created or 
organized. 
‘‘(B) QUALIFYING
INSURANCE
COMPANY 
BRANCH.—The term ‘home country’ means, 
with respect to a qualifying insurance company 
branch, the country in which the principal office 
of such branch is located and in which such 
branch is licensed, authorized, or regulated by 
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the applicable insurance regulatory body to sell 
insurance, reinsurance, or annuity contracts to 
persons other than related persons (as defined 
in section 954(b)) in such country. 
‘‘(7) ANTI-ABUSE RULES.—For purposes of ap-
plying this subsection and section 954(d)— 
‘‘(A) the rules of section 954(c)(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(d), 
‘‘(D) a contract of insurance or reinsur-
ance 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, annu-
itant, or beneficiary is a resident of the 
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United States and such contract was mar-
keted 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 quali-
fying 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 insur-
ance company branches of a qualifying insur-
ance company in order to clearly reflect the in-
come of such branches, and 
‘‘(F) premiums from a contract shall not 
be taken into account for purposes of para-
graph (2)(B) or (3) if such contract reinsures 
a contract issued or reinsured by a related per-
son (as defined in section 954(b)). 
‘‘(8) COORDINATION WITH SECTION 956(a).— 
‘‘(A) IN GENERAL.—In determining insur-
ance income for purposes of section 956(a), ex-
empt insurance income shall not include income 
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derived from exempt contracts which cover risks 
other than applicable home country risks. 
‘‘(B) 
APPLICABLE
HOME
COUNTRY 
RISKS.—For purposes of subparagraph (A), 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 quali-
fying insurance company or qualifying insur-
ance company branch, as the case may be, 
issuing or reinsuring the contract covering the 
risks. 
‘‘(9) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate to carry out the purposes of this sub-
section and section 954(d). 
‘‘(10) CROSS REFERENCE.—For treatment of 
certain investment income derived by qualifying in-
surance companies, see section 954(d). 
‘‘SEC. 956. SPECIAL RULE FOR CERTAIN CAPTIVE INSUR-
ANCE COMPANIES. 
‘‘(a) TREATMENT AS CONTROLLED FOREIGN COR-
PORATIONS AND UNITED STATES SHAREHOLDERS.— 
‘‘(1) IN GENERAL.—For purposes only of tak-
ing into account related person insurance income— 
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100 
‘‘(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 sec-
tion 958(a)) any stock of the foreign corpora-
tion, 
‘‘(B) the term ‘controlled foreign corpora-
tion’ 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 sec-
tion 951(a)(1) shall be determined under para-
graph (5) of this subsection. 
‘‘(2) RELATED PERSON INSURANCE INCOME.— 
For purposes of this subsection, the term ‘related 
person insurance income’ means any insurance in-
come (within the meaning of section 955(a)) attrib-
utable 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 share-
holder. 
‘‘(3) EXCEPTIONS.— 
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101 
‘‘(A) CORPORATIONS
NOT
HELD
BY
IN-
SURED.—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 prin-
ciples of section 883(c)(4)) by persons who are 
(directly or indirectly) insured under any policy 
of insurance or reinsurance issued by such cor-
poration 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 re-
lated person insurance income (determined on a 
gross basis) of such corporation for such tax-
able year is less than 20 percent of its insur-
ance income (as so determined) for such taxable 
year. 
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102 
‘‘(C) ELECTION TO TREAT INCOME AS EF-
FECTIVELY 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 in-
surance 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 in-
come granted by the United States 
under any treaty between the United 
States and any foreign country, and 
‘‘(ii) such corporation meets such re-
quirements 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 
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lotter on DSK5VPTVN1PROD with BILLS
103 
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
ELEC-
TION IN EFFECT.— 
‘‘(I) IN
GENERAL.—Except as 
provided in subclause (II), any elec-
tion 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 for-
eign corporation which made an elec-
tion under subparagraph (C) for any 
taxable year is a disqualified corpora-
tion for any subsequent taxable year, 
such election shall not apply to any 
taxable year beginning after such sub-
sequent taxable year. 
‘‘(ii) EXEMPTION FROM TAX IMPOSED 
BY
SECTION
4371.—The tax imposed by 
section 4371 shall not apply with respect 
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104 
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 ‘disquali-
fied corporation’ means, with respect to any 
taxable year, any foreign corporation which is a 
controlled foreign corporation at any time dur-
ing such taxable year (determined without re-
gard 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 COM-
PANIES.—In the case of a mutual insurance com-
pany— 
‘‘(A) this subsection shall apply, 
‘‘(B) policyholders of such company shall 
be treated as shareholders, and 
‘‘(C) appropriate adjustments in the appli-
cation of this subpart shall be made under reg-
ulations prescribed by the Secretary. 
‘‘(5) DETERMINATION OF PRO RATA SHARE.— 
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lotter on DSK5VPTVN1PROD with BILLS
105 
‘‘(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 deter-
mined under paragraph (2) of section 
951(a) if— 
‘‘(I) only related person insur-
ance 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 subpara-
graph (B) of such paragraph (2), or 
‘‘(ii) the amount which would be de-
termined 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 PROVI-
SIONS.—The Secretary shall prescribe regula-
tions providing for such modifications to the 
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lotter on DSK5VPTVN1PROD with BILLS
106 
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(b). 
‘‘(B) TREATMENT OF CERTAIN LIABILITY 
INSURANCE POLICIES.—In the case of any pol-
icy of insurance covering liability arising from 
services performed as a director, officer, or em-
ployee of a corporation or as a partner or em-
ployee of a partnership, the person performing 
such services and the entity for which such 
services are performed shall be treated as re-
lated persons. 
‘‘(7) REGULATIONS.—The Secretary shall pre-
scribe 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 ar-
rangements 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 
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107 
to any foreign corporation if neither such per-
son (nor any related person to such person) is 
(directly or indirectly) insured under any policy 
of insurance or reinsurance issued by such for-
eign corporation. 
‘‘(b) 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 defini-
tion of United States shareholder under sub-
section (a)(1)(B)), 
‘‘(B) such foreign corporation would qual-
ify 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, 
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lotter on DSK5VPTVN1PROD with BILLS
108 
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 para-
graph (1) for any subsequent taxable year, such 
election shall not apply to any taxable year be-
ginning after such subsequent taxable year. 
‘‘(3) EFFECT OF ELECTION.— 
‘‘(A) IN GENERAL.—For purposes of sec-
tion 367, any foreign corporation making an 
election under paragraph (1) shall be treated as 
transferring (as of the 1st day of the 1st tax-
able year to which such election applies) all of 
its assets to a domestic corporation in connec-
tion with an exchange to which section 354 ap-
plies. 
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109 
‘‘(B) EXCEPTION FOR PRE-1988 EARNINGS 
AND PROFITS.— 
‘‘(i) IN
GENERAL.—Earnings and 
profits of the foreign corporation accumu-
lated 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 sub-
paragraph (A). 
‘‘(ii) 
TREATMENT
OF
DISTRIBU-
TIONS.—For purposes of this title, any dis-
tribution 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.—Sec-
tion 884 to the extent the foreign corpora-
tion reinvested 1987 earnings and profits 
in United States assets shall be applied 
without regard to paragraph (1), except 
that, in the case of a corporation to which 
an election under paragraph (1) applies, 
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lotter on DSK5VPTVN1PROD with BILLS
110 
only earnings and profits accumulated in 
taxable years beginning before January 1, 
1988, shall be taken into account. 
‘‘(4) 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 cor-
poration transferring (as of the 1st day of such sub-
sequent taxable year) all of its property to a foreign 
corporation in connection with an exchange to which 
section 354 applies. 
‘‘(5) ADDITIONAL TAX ON CORPORATION MAK-
ING 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— 
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lotter on DSK5VPTVN1PROD with BILLS
111 
‘‘(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.’’. 
(b) TREATMENT OF CERTAIN EXCLUDED SUBPART 
F INCOME
AS PREVIOUSLY TAXED INCOME.—Section 
959(g), as added by section 331, is amended to read as 
follows: 
‘‘(g) SPECIAL RULES FOR NONTAXED PORTION OF 
CERTAIN INCOME.—For purposes of this section— 
‘‘(1) IN
GENERAL.—A United States share-
holder’s pro rata share of the excludable portion of 
the controlled foreign corporation’s subpart F in-
come shall be treated as an amount which has been 
included in gross income under section 951(a). 
‘‘(2) ORDERING RULE.—Notwithstanding sub-
section (c), for purposes of subsections (a) and (b), 
section 316(a) shall be applied by applying para-
graph (2) thereof and then paragraph (1) thereof— 
‘‘(A) first to the deductible portion (as de-
fined in section 966(c)(3)) of the increase in 
subpart 
F 
income 
described 
in 
section 
966(a)(1) included in the gross income of 
United 
States 
shareholders 
under 
section 
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lotter on DSK5VPTVN1PROD with BILLS
112 
951(a)(1) 
(after 
application 
of 
section 
965(b)(2)(A)), 
‘‘(B) second to the excludable portion of 
the controlled foreign corporation’s subpart F 
income, and 
‘‘(C) then to the amounts described in 
paragraph (1), (2), or (3) of subsection (c) in 
accordance with the provisions of subsection (c). 
‘‘(3) DEFINITIONS.—For purposes of this sub-
section— 
‘‘(A) DEDUCTIBLE
PORTION.—The term 
‘deductible portion’ has the meaning given such 
term by section 966(c)(3). 
‘‘(B) EXCLUDABLE
PORTION.—The term 
‘excludable portion’ means, with respect to the 
subpart F income of a controlled foreign cor-
poration, so much of such controlled foreign 
corporation’s modified active income as is not 
taken into account in computing subpart F in-
come under section 952(a)(1).’’. 
(c) GAINS AND LOSSES FROM THE SALE OF CFC 
STOCK.— 
(1) GAINS.— 
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113 
(A) IN GENERAL.—Part I of subchapter P 
of chapter 1 is amended by adding at the end 
the following new section: 
‘‘SEC. 1203. GAINS FROM SALES OR EXCHANGES OF STOCK 
IN CONTROLLED FOREIGN CORPORATIONS. 
‘‘(a) IN GENERAL.—In the case of a United States 
shareholder (as defined in section 951), there shall be ex-
cluded from gross income an amount equal to the applica-
ble portion of the amount of any gain recognized from the 
sale or exchange of stock in a controlled foreign corpora-
tion. 
‘‘(b) APPLICABLE PORTION.—For purposes of this 
section— 
‘‘(1) IN GENERAL.—The term ‘applicable por-
tion’ means the amount which bears the same ratio 
to the gain recognized from such sale or exchange 
as— 
‘‘(A) the shareholder’s pro rata share (de-
termined under section 951(a)(2)) of the ex-
cludable portion of the aggregate subpart F in-
come of the controlled foreign corporation for 
the applicable period, bears to 
‘‘(B) the sum of the amount determined 
under subparagraph (A) plus the shareholder’s 
pro rata share (determined under section 
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114 
951(a)(2)) of the aggregate subpart F income 
of the controlled foreign corporation for the ap-
plicable period. 
‘‘(2) EXCLUDABLE PORTION.—For purposes of 
this section, the term ‘excludable portion’ has the 
meaning given such term by section 959(g)(3)(B). 
‘‘(3) APPLICABLE PERIOD.—The term ‘applica-
ble period’ means, with respect to any stock, the 
shorter of the 3-taxable-year period immediately pre-
ceding the taxable year of the sale or exchange or 
the shareholder’s holding period in the stock. In no 
event shall the applicable period include any portion 
of any taxable year beginning before the applicable 
date (as defined in section 300 of the Infrastructure 
2.0 Act).’’. 
(B) CLERICAL AMENDMENT.—The table of 
sections for part I of subchapter P of chapter 
1 is amended by adding at the end the following 
new item: 
‘‘Sec. 1203. Gains from sales or exchanges of stock in controlled foreign cor-
porations.’’. 
(2) LOSSES.— 
(A) IN GENERAL.—Part II of subchapter P 
of chapter 1 is amended by adding at the end 
the following new section: 
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115 
‘‘SEC. 1213. LOSSES FROM SALES OR EXCHANGES OF STOCK 
IN CONTROLLED FOREIGN CORPORATIONS. 
‘‘(a) IN GENERAL.—In the case of a United States 
shareholder (as defined in section 951), any loss from the 
sale or exchange of stock in a controlled foreign corpora-
tion shall be reduced (but not below zero) by an amount 
equal to the shareholder’s aggregate pro rata share (deter-
mined under section 951(a)(2)) of the excludable portion 
of the subpart F income of the controlled foreign corpora-
tion during the shareholder’s holding period in the stock. 
‘‘(b) EXCLUDABLE PORTION.—For purposes of this 
section, the term ‘excludable portion’ has the meaning 
given such term by section 959(g)(3)(B).’’. 
(B) CLERICAL AMENDMENT.—The table of 
sections for part I of subchapter P of chapter 
1 is amended by adding at the end the following 
new item: 
‘‘Sec. 1213. Losses from sales or exchanges of stock in controlled foreign cor-
porations.’’. 
(d) REPEAL OF ORDINARY INCOME TREATMENT FOR 
GAINS FROM THE SALE OF STOCK IN CERTAIN FOREIGN 
CORPORATIONS.— 
(1) IN GENERAL.—Part IV of subchapter P of 
chapter 1 is amended by striking section 1248. 
(2) CONFORMING AMENDMENTS.— 
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116 
(A) Section 245(a) is amended by striking 
paragraph (11). 
(B) Section 338(h) is amended— 
(i) in paragraph (6)(B)(ii), by striking 
‘‘or described in section 1248(e)’’, and 
(ii) in paragraph (16), by striking the 
second sentence. 
(C) Section 751 is amended— 
(i) in subsection (c), by striking 
‘‘stock in certain foreign corporations (as 
described in section 1248),’’, and 
(ii) by striking subsection (e) and re-
designating subsection (f) as subsection 
(e). 
(D) Section 865(k) is amended to read as 
follows: 
‘‘(k) CROSS REFERENCE.—For sourcing of income 
from certain foreign currency transactions, see section 
988.’’. 
(E) Section 904(h)(7) is amended by strik-
ing ‘‘or as a dividend under section 1248’’. 
(F) Section 951(a)(2) is amended by strik-
ing the last sentence thereof. 
(G) Section 964 is amended by striking 
subsection (e). 
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117 
(H) Section 989(b) is amended by striking 
paragraph (2) and by redesignating paragraphs 
(3) and (4) as paragraphs (2) and (3), respec-
tively. 
(e) COORDINATION WITH AMOUNTS INCLUDED IN 
GROSS INCOME OF UNITED STATES SHAREHOLDERS.— 
(1) IN
GENERAL.—Paragraph (1) of section 
951(a) is amended by striking ‘‘such taxable year of 
the corporation ends—’’ and all that follows through 
the end period and inserting: ‘‘such taxable year of 
the corporation ends, the shareholder’s pro rata 
share (determined under paragraph (2)) of the cor-
poration’s subpart F income for such taxable year.’’. 
(2) CONFORMING AMENDMENTS.— 
(A) Section 951(a) is amended— 
(i) by striking ‘‘paragraph (1)(A)(i)’’ 
in paragraph (2) and inserting ‘‘paragraph 
(1)’’, and 
(ii) by striking paragraph (3). 
(B) 
Subparagraph 
(A) 
of 
section 
512(b)(17) 
is 
amended 
by 
striking 
‘‘951(a)(1)(A)’’ and inserting ‘‘951(a)(1)’’. 
(C) Section 851(b) is amended by striking 
‘‘951(a)(1)(A)(i)’’ in the first sentence following 
paragraph (3) and inserting ‘‘951(a)(1)’’. 
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118 
(D) Section 959(a) is amended— 
(i) by striking ‘‘shall not, when’’ and 
all that follows through ‘‘such shareholder’’ 
and inserting ‘‘shall not, when actually dis-
tributed to such shareholder’’, and 
(ii) by striking ‘‘and the rules of sub-
section (f) shall apply for purposes of para-
graph (2) of this subsection’’. 
(E) Section 959(c) is amended by adding 
at the end the following: ‘‘References in this 
subsection 
and 
subsection 
(f) 
to 
section 
951(a)(1)(B) shall be treated as references to 
such provisions as in effect on the day before 
the enactment of the Infrastructure 2.0 Act.’’. 
(F) Section 959(e) is amended by striking 
‘‘951(a)(1)(A)’’ and inserting ‘‘951(a)(1)’’. 
(G) Section 989(b)(3) is amended by strik-
ing ‘‘951(a)(1)(A)’’ and inserting ‘‘951(a)(1)’’. 
(H) Section 1298(b) is amended by strik-
ing paragraph (8). 
(f) APPLICATION
OF
ANTI-LOSS
IMPORTATION 
RULES.—Section 362(e)(1)(B) is amended by adding at 
the end the following new sentence: ‘‘For purposes of 
clause (i), except as provided under regulations, a con-
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119 
trolled foreign corporation shall be considered to be sub-
ject to tax under this subtitle.’’. 
(g) OTHER CONFORMING AMENDMENTS.— 
(1) 
Sections 
163(e)(3)(B)(i) 
and 
267(a)(3)(B)(i) are each amended by striking ‘‘and 
qualified deficits under section 952(c)(1)(B)’’ and 
inserting ‘‘and loss carryforwards under sections 
952(d) and 953(b)’’. 
(2) Section 304(b)(5)(B)(ii) is amended by 
striking ‘‘953(c)’’ and inserting ‘‘956(a)’’. 
(3) Section 355(g)(2)(B)(ii)(I) is amended by 
striking ‘‘section 954(h)(4)’’ and inserting ‘‘section 
954(c)(4)’’. 
(4) Section 512(b)(17) is amended by striking 
‘‘953’’ and inserting ‘‘section 955’’. 
(5) Section 864(d)(8) is amended by striking 
‘‘or section 956(b)(3)’’. 
(6) Section 864(d)(5)(A) is amended— 
(A) by striking clause (iii) and redesig-
nating clause (iv) as clause (iii), and 
(B) by striking ‘‘954(c)(3)(A)’’ in clause 
(iii) (as redesignated by subparagraph (A)) and 
inserting ‘‘954(a)(3)(A)’’. 
(7) Section 864(d)(7)(B) is amended by strik-
ing ‘‘foreign base company income (as defined in 
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lotter on DSK5VPTVN1PROD with BILLS
120 
section 954(a), determined without regard to section 
954(b)(3)(A))’’ and inserting ‘‘passive income (as 
defined in section 954(a))’’. 
(8) Section 881(c)(5)(A)(iii) is amended by 
striking 
‘‘954(c)(3)(A)’’ 
and 
inserting 
‘‘954(a)(3)(A)’’. 
(9) Section 884(d)(2)(D) is amended by strik-
ing ‘‘953(c)(3)(C)’’ and inserting ‘‘956(a)(3)(C)’’. 
(10) Section 898(b)(3) is amended— 
(A) by striking ‘‘953(c)(2)’’ and inserting 
‘‘956(a)(2)’’, and 
(B) by striking ‘‘953(c)(1)’’ and inserting 
‘‘956(a)(1)’’. 
(11) Section 936(h)(5) is amended— 
(A) by inserting ‘‘(as in effect on the day 
before the enactment of the Infrastructure 2.0 
Act)’’ after ‘‘section 954’’ in the last sentence 
of subparagraph (B)(ii), and 
(B) in subparagraph (F)(iv)(II)— 
(i) by inserting ‘‘(as in effect on the 
day before the enactment of the Infrastruc-
ture 2.0 Act)’’ after ‘‘section 954’’, and 
(ii) by inserting ‘‘(as so in effect)’’ 
after ‘‘section 954(a)’’. 
(12) Section 957(b) is amended— 
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121 
(A) by striking ‘‘income described in sec-
tion 953(a)’’ and inserting ‘‘income described in 
section 955(a)’’, and 
(B) by striking ‘‘contracts described in sec-
tion 953(a)(1)’’ and inserting ‘‘contracts de-
scribed in section 955(a)(1)’’. 
(13) Section 958(b) is amended— 
(A) by striking ‘‘956(c)(2),’’ before ‘‘and 
957’’, 
(B) by striking ‘‘to treat the stock of a do-
mestic corporation as owned by a United States 
shareholder of the controlled foreign corpora-
tion for purposes of section 956(c)(2),’’, and 
(C) by striking the last sentence. 
(14) Section 964(b) is amended by striking 
‘‘sections 952, 955, and 956’’ and inserting ‘‘section 
952’’. 
(15) Section 964(e)(2) is amended by striking 
‘‘954(c)(3)(A)’’ and inserting ‘‘954(a)(3)(A)’’. 
(16)(A) Part III of subchapter N of chapter 1 
is amended by striking subpart G. 
(B) Section 865(e)(2)(A) is amended by strik-
ing the last sentence. 
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122 
(C) The table of subparts for part III of sub-
chapter N of chapter 1 is amended by striking the 
item relating to subpart G. 
(17) Section 999(c) is amended— 
(A) by striking ‘‘, 952(a)(3)’’ in paragraph 
(1), and 
(B) by striking ‘‘, the addition to subpart 
F income under section 952(a)(3),’’ in para-
graph (2). 
(18) Section 1296(f)(2) is amended— 
(A) by striking ‘‘foreign personal holding 
company 
income 
described 
in 
section 
954(c)(1)(A)’’ in subparagraph (A) and insert-
ing ‘‘passive income (as defined in section 
954(a))’’, and 
(B) by striking ‘‘foreign personal holding 
company income so described’’ in subparagraph 
(B) and inserting ‘‘such passive income’’. 
(19) Section 1297(b) is amended to read as fol-
lows: 
‘‘(b) PASSIVE INCOME.— 
‘‘(1) IN GENERAL.—Except as provided in para-
graph (2), the term ‘passive income’ means any in-
come received or accrued by any foreign corporation 
which is of a kind which would be passive income as 
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123 
defined in section 954 if the foreign corporation 
were a controlled foreign corporation. 
‘‘(2) EXCEPTION.—Except as provided in regu-
lations, the term ‘passive income’ does not include 
any income which is interest, a dividend, or a rent 
or royalty, which is received or accrued from a re-
lated person (within the meaning of section 954(b)) 
to the extent that such amount is properly allocable 
(under regulations prescribed by the Secretary) to 
income of such related person which is not passive 
income.’’. 
(20) The following sections are amended by 
striking ‘‘954(d)(3)’’ each place it appears and in-
serting ‘‘954(b)’’: 
(A) Section 958(b). 
(B) Section 988(a)(3)(C). 
(C) Subsections (d)(3)(A) and (e)(2)(B)(i) 
of section 1298. 
(D) Section 1471(e)(2). 
(E) Section 3121(z)(2). 
(21) The table of sections for subpart F of part 
III of subchapter N of chapter 1 is amended by 
striking the items relating to sections 952 through 
956 and inserting the following: 
‘‘Sec. 952. Subpart F income defined. 
‘‘Sec. 953. Active foreign market income. 
‘‘Sec. 954. Definition of passive income. 
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124 
‘‘Sec. 955. Definition of insurance income. 
‘‘Sec. 956. Special rule for certain captive insurance companies.’’. 
(h) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
shall apply to taxable years of foreign corporations 
beginning on or after the applicable date, and to tax-
able years of United States shareholders with or 
within which such taxable years of foreign corpora-
tions end. 
(2) GAINS AND LOSSES FROM THE SALE OF CFC 
STOCK; REPEAL
OF
SECTION
1248.—The amend-
ments made by subsections (c) and (d) shall apply 
to sales or exchanges on or after the applicable date. 
SEC. 302. DEEMED REPATRIATION UPON TRANSITION TO 
FALLBACK INTERNATIONAL TAX REFORM. 
(a) IN GENERAL.—Subpart F of part III of sub-
chapter N of chapter 1 of the Internal Revenue Code of 
1986 is amended by adding at the end the following new 
section: 
‘‘SEC. 966. DEEMED REPATRIATION UPON TRANSITION TO 
FALLBACK INTERNATIONAL TAX REFORM. 
‘‘(a) TREATMENT OF DEFERRED FOREIGN INCOME 
AS SUBPART F INCOME.—In the case of the last taxable 
year of a deferred foreign income corporation which begins 
before the applicable date (as defined in section 300 of 
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125 
the Infrastructure 2.0 Act), the subpart F income of such 
foreign corporation (as otherwise determined for such tax-
able year under section 952) shall be increased by the in-
clusion percentage (as defined in section 952(d) as in ef-
fect for taxable years beginning on or after the applicable 
date (as so defined))) of the accumulated post-1986 de-
ferred foreign income of such corporation determined as 
of the close of such last taxable year. 
‘‘(b) APPLICATION OF CERTAIN RULES.—Rules simi-
lar to the rules of subsections (b), (f), (g), (i), and (j) 
of section 965 shall apply for purposes of this section. 
‘‘(c) DEFINITIONS.—Terms used in this section 
which are also used in section 965 shall have the same 
meanings when used in this section as when such terms 
are used in section 965.’’. 
(b) CLERICAL AMENDMENT.—The table of sections 
for subpart F of part III of subchapter N of chapter 1 
of such Code is amended by adding at the end the fol-
lowing: 
‘‘Sec. 966. Deemed repatriation upon transition to fallback international tax re-
form.’’. 
PART II—FOREIGN TAX CREDIT LIMITATIONS 
SEC. 311. REFORM OF FOREIGN TAX CREDIT LIMITATION. 
(a) IN GENERAL.—Subsection (d) of section 904 is 
amended to read as follows: 
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126 
‘‘(d) SEPARATE APPLICATION OF SECTION WITH RE-
SPECT TO CERTAIN CATEGORIES OF INCOME.— 
‘‘(1) IN
GENERAL.—The provisions of sub-
sections (a), (b), and (c) and sections 907 and 960 
shall be applied separately with respect to— 
‘‘(A) amounts included under section 
951(a) which are attributable to active foreign 
market income (as defined in section 953), 
‘‘(B) passive category income, and 
‘‘(C) income other than income described 
in either of the preceding subparagraphs. 
‘‘(2) DEFINITIONS AND SPECIAL RULES.— 
‘‘(A) PASSIVE CATEGORY INCOME.— 
‘‘(i) IN GENERAL.—The term ‘passive 
category income’ means— 
‘‘(I) United States taxpayer pas-
sive income described in subparagraph 
(B), and 
‘‘(II) income which is included in 
gross income of the taxpayer under 
section 951(a)(1) to the extent such 
income is attributable to passive in-
come (as defined in section 954(a)). 
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127 
‘‘(ii) EXCEPTION
FOR
HIGH-TAXED 
INCOME.—Passive category income shall 
not include any high-taxed income. 
‘‘(iii) CLARIFICATION OF APPLICATION 
OF
SECTION 864(d)(6).—In determining 
whether any income is passive category in-
come, the rules of section 864(d)(6) shall 
apply only in the case of income of a con-
trolled foreign corporation. 
‘‘(B) UNITED STATES TAXPAYER PASSIVE 
INCOME.—United States taxpayer passive in-
come described in this subparagraph is income 
received or accrued by the taxpayer which is of 
a kind that would be passive income as defined 
under section 954(a) if such taxpayer were a 
controlled foreign corporation. 
‘‘(C) TREATMENT OF FINANCIAL SERVICES 
INCOME AND COMPANIES.— 
‘‘(i) IN GENERAL.—Financial services 
income which is not active foreign market 
category income shall be treated as income 
described in paragraph (1)(C) in the case 
of— 
‘‘(I) a member of a financial 
services group, and 
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128 
‘‘(II) any other person if such 
person is predominantly engaged in 
the active conduct of a banking, insur-
ance, financing, or similar business. 
‘‘(ii) FINANCIAL SERVICES GROUP.— 
The term ‘financial services group’ means 
any affiliated group (as defined in section 
1504(a) without regard to paragraphs (2) 
and (3) of section 1504(b)) which is pre-
dominantly engaged in the active conduct 
of a banking, insurance, financing, or simi-
lar business. In determining whether such 
a group is so engaged, there shall be taken 
into account only the income of members 
of the group that are— 
‘‘(I) United States corporations, 
or 
‘‘(II) controlled foreign corpora-
tions in which such United States cor-
porations own, directly or indirectly, 
at least 80 percent of the total voting 
power and value of the stock. 
‘‘(iii) 
PASS-THRU
ENTITIES.—The 
Secretary shall by regulation specify for 
purposes of this subparagraph the treat-
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129 
ment of financial services income received 
or accrued by partnerships and by other 
pass-thru entities which are not members 
of a financial services group. 
‘‘(D) FINANCIAL SERVICES INCOME.— 
‘‘(i) IN GENERAL.—Except as other-
wise provided in this subparagraph, the 
term ‘financial services income’ means any 
income which is received or accrued by any 
person predominantly engaged in the active 
conduct of a banking, insurance, financing, 
or similar business, and which is— 
‘‘(I) described in clause (ii), or 
‘‘(II) United States taxpayer pas-
sive income (determined without re-
gard to subparagraph (A)(ii)). 
‘‘(ii) GENERAL DESCRIPTION OF FI-
NANCIAL
SERVICES
INCOME.—Income is 
described in this clause if such income is— 
‘‘(I) derived in the active conduct 
of a banking, financing, or similar 
business, 
‘‘(II) derived from the investment 
by an insurance company of its un-
earned premiums or reserves ordinary 
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130 
and necessary for the proper conduct 
of its insurance business, or 
‘‘(III) of a kind which would be 
insurance income as defined in section 
955(a). 
‘‘(E) HIGH-TAXED
INCOME.—The term 
‘high-taxed income’ means any income which 
(but for this subparagraph) would be passive 
category income if the sum of— 
‘‘(i) the foreign income taxes paid or 
accrued by the taxpayer with respect to 
such income, and 
‘‘(ii) the foreign income taxes deemed 
paid by the taxpayer with respect to such 
income under section 960, 
exceeds the highest rate of tax specified in sec-
tion 1 or 11 (whichever applies) multiplied by 
the amount of such income (determined with re-
gard to section 78). For purposes of the pre-
ceding sentence, the term ‘foreign income taxes’ 
means any income, war profits, or excess profits 
tax imposed by any foreign country or posses-
sion of the United States. 
‘‘(F) TREATMENT OF INCOME TAX BASE 
DIFFERENCES.— 
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131 
‘‘(i) IN GENERAL.—In the case of tax-
able years beginning after December 31, 
2006, tax imposed under the law of a for-
eign country or possession of the United 
States on an amount which does not con-
stitute income under United States tax 
principles shall be treated as imposed on 
income described in paragraph (1)(C). 
‘‘(ii) SPECIAL
RULES
FOR
YEARS 
AFTER 2006 AND BEFORE THE APPLICABLE 
DATE.—In the case of taxable years begin-
ning after December 31, 2006, and on or 
before the applicable date (as defined in 
section 300 of the Infrastructure 2.0 Act), 
tax imposed under the law of a foreign 
country or possession of the United States 
on an amount which does not constitute in-
come under United States tax principles 
shall be treated as imposed on income de-
scribed in paragraph (1)(B) (as in effect 
for taxable years beginning the day before 
such applicable date). 
‘‘(iii) SPECIAL RULE FOR YEARS BE-
FORE 2007.— 
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132 
‘‘(I) IN GENERAL.—In the case 
of taxes paid or accrued in taxable 
years beginning after December 31, 
2004, and before January 1, 2007, a 
taxpayer may elect to treat tax im-
posed under the law of a foreign coun-
try or possession of the United States 
on an amount which does not con-
stitute income under United States 
tax principles as tax imposed on in-
come described in subparagraph (C) 
or (I) of paragraph (1) (as in effect 
for taxable years beginning in 2006). 
‘‘(II) REVOCATION.—Any such 
election shall apply to the taxable year 
for which made and all subsequent 
taxable years described in subclause 
(I) unless revoked with the consent of 
the Secretary. 
‘‘(G) TRANSITION
RULES
FOR
CERTAIN 
CARRYFORWARDS AND CARRYBACKS.—For pur-
poses of paragraph (1)— 
‘‘(i) in the case of any taxes carried 
from any taxable year beginning before the 
applicable date (as defined in section 300 
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133 
of the Infrastructure 2.0 Act), to any tax-
able year beginning on or after such 
date— 
‘‘(I) if such taxes were treated as 
attributable to income described in 
paragraph (1)(A) (as in effect for tax-
able years beginning the day before 
such applicable date), such taxes shall 
be treated as attributable to income 
described in paragraph (1)(B), and 
‘‘(II) if such taxes were treated 
as attributable to income described in 
paragraph (1)(B) (as in effect for tax-
able years beginning the day before 
such applicable date), such taxes shall 
be treated as attributable to income 
described in paragraph (1)(C), and 
‘‘(ii) the Secretary may by regulations 
provide for the allocation of any carryback 
of taxes with respect to income from a tax-
able year beginning on or after such appli-
cable date, to a taxable year beginning be-
fore such date for purposes of allocating 
such income among the separate categories 
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134 
in effect for the taxable year to which car-
ried. 
‘‘(3) CONTROLLED
FOREIGN
CORPORATION; 
UNITED STATES SHAREHOLDER.—For purposes of 
this subsection— 
‘‘(A) CONTROLLED
FOREIGN
CORPORA-
TION.—The term ‘controlled foreign corpora-
tion’ has the meaning given such term by sec-
tion 957 (taking into account section 956(a)). 
‘‘(B) UNITED
STATES
SHAREHOLDER.— 
The term ‘United States shareholder’ has the 
meaning given such term by section 951(b) 
(taking into account section 956(a)). 
‘‘(4) 
SEPARATE
APPLICATION
TO
ITEMS 
RESOURCED UNDER TREATIES.— 
‘‘(A) IN GENERAL.—If— 
‘‘(i) without regard to any treaty obli-
gation of the United States, any item of 
income would be treated as derived from 
sources within the United States, 
‘‘(ii) under a treaty obligation of the 
United States, such item would be treated 
as arising from sources outside the United 
States, and 
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135 
‘‘(iii) the taxpayer chooses the bene-
fits of such treaty obligation, 
subsections (a), (b), and (c) of this section and 
sections 907 and 960 shall be applied sepa-
rately with respect to each such item. 
‘‘(B) COORDINATION WITH OTHER PROVI-
SIONS.—This paragraph shall not apply to any 
item of income to which subsection (h)(10) or 
section 865(h) applies. 
‘‘(C) REGULATIONS.—The Secretary may 
issue such regulations as may be necessary or 
appropriate to carry out the purposes of this 
paragraph, including regulations which provide 
that related items of income may be aggregated 
for purposes of this paragraph. 
‘‘(5) REGULATIONS.—The Secretary shall pre-
scribe such regulations as may be necessary or ap-
propriate for the purposes of this subsection, includ-
ing preventing the manipulation of the character of 
income the effect of which is to avoid the purposes 
of this subsection.’’. 
(b) APPLICATION OF PER COUNTRY LIMITATION.— 
Section 904 is amended by inserting after subsection (d) 
the following new subsection: 
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136 
‘‘(e) LIMITATIONS APPLIED
ON
A PER COUNTRY 
BASIS.—The provisions of subsections (a), (b), (c), and 
(d) and sections 907 and 960 shall be applied separately 
with respect to each foreign country or possession with 
respect to which taxes described in section 901(b) are paid 
or accrued.’’. 
(c) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years beginning on or 
after the applicable date. 
SEC. 312. DENIAL OF CREDIT AND DEDUCTION FOR FOR-
EIGN TAXES WITH RESPECT TO EXCLUDED 
SUBPART F INCOME. 
(a) IN GENERAL.—Section 901 is amended by redes-
ignating subsection (n) as subsection (o) and by inserting 
after subsection (m) the following: 
‘‘(n) DENIAL OF FOREIGN TAX CREDIT AND DEDUC-
TION WITH RESPECT TO EXCLUDED SUBPART F IN-
COME.— 
‘‘(1) IN
GENERAL.—Notwithstanding section 
960(b), no credit shall be allowed under subsection 
(a) for any income, war profits, or excess profits 
taxes paid or accrued (or deemed paid or accrued 
under section 960) with respect to the excludable 
portion of subpart F income or any distribution re-
ceived by a United States shareholder (as defined in 
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137 
section 951(b)) which is properly attributable to 
such excludable portion. No deduction shall be al-
lowed to a taxpayer under this chapter for any tax 
for which a credit is not allowable by reason of the 
preceding sentence. 
‘‘(2) EXCLUDABLE
PORTION.—The term ‘ex-
cludable portion’ has the meaning given such term 
by section 959(g)(3)(B). 
‘‘(3) COORDINATION WITH SECTION 78.—Sec-
tion 78 shall not apply to any tax which is not allow-
able as a credit under this section by reason of this 
subsection.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years of foreign corpora-
tions beginning on or after the applicable date, and to tax-
able years of United States shareholders with or within 
which such taxable years of foreign corporations end. 
PART III—EXPENSE DISALLOWANCE 
SEC. 321. DISALLOWANCE OF DEDUCTION FOR EXPENSES 
ALLOCABLE TO EXEMPT INCOME OF A CON-
TROLLED FOREIGN CORPORATION. 
(a) IN GENERAL.—Part IX of subchapter B of chap-
ter 1 is amended by adding at the end the following: 
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138 
‘‘SEC. 265A. EXPENSES ALLOCABLE TO EXEMPT INCOME OF 
A CONTROLLED FOREIGN CORPORATION. 
‘‘(a) IN GENERAL.—In the case of a United States 
shareholder of a controlled foreign corporation for any tax-
able year, no deduction shall be allowed under this chapter 
for— 
‘‘(1) the disallowed portion of any allocable 
CFC interest, or 
‘‘(2) expenses directly allocable to the exclud-
able portion of subpart F income (as defined in sec-
tion 959(g)(3)(B)). 
‘‘(b) DISALLOWED PORTION.—For purposes of this 
section— 
‘‘(1) IN GENERAL.—The term ‘disallowed por-
tion’ means, with respect to any allocable CFC inter-
est in connection with a controlled foreign corpora-
tion, the exclusion percentage of the amount which 
bears the same ratio to the amount of such interest 
as— 
‘‘(A) the corporation’s modified active in-
come (as defined in section 952) for the appli-
cable taxable year, bears to 
‘‘(B) the corporation’s current earnings 
and profits. 
‘‘(2) CURRENT EARNINGS AND PROFITS.—For 
purposes of this subsection— 
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139 
‘‘(A) IN
GENERAL.—The term ‘current 
earnings and profits’ means the earnings and 
profits of the controlled foreign corporation for 
the applicable taxable year, without diminution 
by reason of distributions made during the tax-
able year. 
‘‘(B) SPECIAL
RULE
FOR
DETERMINING 
EARNINGS AND PROFITS.—Earnings and profits 
of any controlled foreign corporation shall be 
determined without regard to paragraphs (4), 
(5), and (6) of section 312(n). Under regula-
tions, the preceding sentence shall not apply to 
the extent it would increase earnings and prof-
its by an amount which was previously distrib-
uted by the controlled foreign corporation. 
‘‘(3) EXCLUSION PERCENTAGE.—The term ‘ex-
clusion percentage’ means, with respect to any con-
trolled foreign corporation for any taxable year, the 
number of percentage points by which 100 percent 
exceeds the inclusion percentage determined under 
section 952(d) with respect to such controlled for-
eign corporation for such taxable year. 
‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur-
poses of this section— 
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140 
‘‘(1) ALLOCABLE
CFC
INTEREST.—The term 
‘allocable CFC interest’ means any interest expense 
paid or accrued during the taxable year by a United 
States shareholder of a controlled foreign corpora-
tion which under section 861, and subsection (e) or 
(f) of section 864 (whichever is applicable), is appor-
tioned to income of the controlled foreign corpora-
tion. 
‘‘(2) APPLICABLE TAXABLE YEAR.—The term 
‘applicable taxable year’ means, with respect to any 
controlled foreign corporation, the taxable year of 
such corporation which ends with or within the tax-
able year of the United States shareholder described 
in subsection (a). 
‘‘(3) UNITED
STATES
SHAREHOLDER; CON-
TROLLED
FOREIGN
CORPORATION.—The 
term 
‘United States shareholder’ has the meaning given 
such term by section 951(b) and the term ‘controlled 
foreign corporation’ shall have the meaning given 
such term by section 957(a). 
‘‘(4) SPECIAL RULE FOR MEMBERS OF AN AF-
FILIATED GROUP.—If a United States shareholder 
to which subsection (a) applies is a domestic cor-
poration which is a member of a group all members 
of which are treated as a single corporation under 
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141 
subsection (e) or (f) of section 864, whichever is ap-
plicable, all domestic corporations which are mem-
bers of such group shall be treated as a single cor-
poration for purposes of this section. 
‘‘(5) SPECIAL RULES.— 
‘‘(A) COORDINATION WITH OTHER PROVI-
SIONS.—Except as provided in regulations, this 
section shall be applied before any other provi-
sion of this chapter limiting the deductibility of 
any allocable CFC interest. 
‘‘(B) SEPARATE APPLICATION TO INCOME 
IN SEPARATE BASKETS.—This section shall be 
applied separately with respect to the categories 
of income under section 904(d)(1). 
‘‘(d) REGULATIONS.—The Secretary shall prescribe 
such regulations as may be necessary to carry out the pur-
poses of this section, including regulations providing— 
‘‘(1) for the sharing of information between 
shareholders if necessary to carry out the provisions 
of this section, 
‘‘(2) for directly associating interest or other 
expenses disallowed under this section with income 
of a controlled foreign corporation and for coordi-
nating this section with other provisions of this 
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142 
chapter limiting the deductibility of interest or other 
expenses, and 
‘‘(3) for the proper application of this section 
with respect to the taxpayer’s share of net operating 
losses of a controlled foreign corporation.’’. 
(b) CONFORMING AMENDMENT.—The table of sec-
tions for part IX of subchapter B of chapter 1 is amended 
by inserting after the item relating to section 265 the fol-
lowing: 
‘‘Sec. 265A. Expense allocable to exempt income of a controlled foreign cor-
poration.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years of foreign corpora-
tions beginning on or after the applicable date, and to tax-
able years of United States shareholders with or within 
which such taxable years of foreign corporations end. 
PART IV—OTHER PROVISIONS RELATING TO 
SUBPART F 
Subpart A—Previously Deferred Foreign Income 
SEC. 331. TREATMENT OF PREVIOUSLY DEFERRED FOR-
EIGN INCOME. 
(a) IN GENERAL.—Subpart F of part III of sub-
chapter N of chapter 1 is amended by adding at the end 
the following new section: 
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143 
‘‘SEC. 966. INCLUSION OF PREVIOUSLY DEFERRED FOR-
EIGN INCOME. 
‘‘(a) INCLUSION AS SUBPART F INCOME.— 
‘‘(1) IN GENERAL.—Subject to the provisions of 
paragraph (2), the subpart F income (determined 
under section 952 without regard to this section) of 
a controlled foreign corporation for its last taxable 
year beginning before the applicable date (as defined 
in section 300 of the Infrastructure 2.0 Act), shall 
be increased by the accumulated deferred foreign in-
come of the corporation. 
‘‘(2) INCLUSION ONLY TO APPLY TO DOMESTIC 
CORPORATIONS.—In the case of any increase in sub-
part F income of a controlled foreign corporation by 
reason of paragraph (1)— 
‘‘(A) notwithstanding section 951(a)(1), 
the inclusion in gross income under such section 
of a United States shareholder’s pro rata por-
tion (as determined under section 951(a)(2)) of 
such increased subpart F income shall only 
apply if the United States shareholder is a do-
mestic corporation, and 
‘‘(B) there shall be allowed as a deduction 
for the taxable year of such United States 
shareholder in which such increased subpart F 
income is included in such shareholder’s gross 
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144 
income under section 951(a)(1) an amount 
equal to the applicable percentage of the 
amount of the income so included. 
‘‘(b) 
ACCUMULATED
DEFERRED
FOREIGN
IN-
COME.—For purposes of this section— 
‘‘(1) IN GENERAL.—The term ‘accumulated de-
ferred foreign income’ means the excess of— 
‘‘(A) the undistributed earnings of the con-
trolled foreign corporation, over 
‘‘(B) the undistributed U.S. earnings of 
such controlled foreign corporation. 
‘‘(2) UNDISTRIBUTED EARNINGS.— 
‘‘(A) IN GENERAL.—The term ‘undistrib-
uted earnings’ means the earnings and profits 
of the controlled foreign corporation described 
in section 959(c)(3), determined— 
‘‘(i) as of the close of the taxable year 
described in subsection (a)(1), 
‘‘(ii) without diminution by reason of 
distributions made during such taxable 
year, and 
‘‘(iii) without regard to this section. 
‘‘(B) SPECIAL RULE FOR CURRENT YEAR 
DISTRIBUTIONS.—For purposes of this chapter, 
any determination with respect to the treatment 
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145 
of distributions described in subparagraph 
(A)(ii) shall be made after the application of 
this section to the earnings and profits de-
scribed in subparagraph (A). 
‘‘(3) UNDISTRIBUTED
U.S. 
EARNINGS.—The 
term ‘undistributed U.S. earnings’ has the meaning 
given the term ‘post-1986 undistributed U.S. earn-
ings’ in section 245(a)(5) (as in effect for taxable 
years beginning the day before the applicable date 
(as defined in section 300 of the Infrastructure 2.0 
Act)), determined— 
‘‘(A) without regard to ‘post-1986’ each 
place it appears in the matter before subpara-
graph (A), and 
‘‘(B) without regard to the last sentence 
thereof. 
‘‘(c) DISALLOWANCE
OF FOREIGN TAX CREDIT, 
ETC.— 
‘‘(1) IN GENERAL.—No credit shall be allowed 
under section 901 to a United States shareholder of 
a controlled foreign corporation for any taxes paid 
or accrued (or treated as paid or accrued) with re-
spect to the deductible portion of— 
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146 
‘‘(A) the increased subpart F income of 
the corporation included in the gross income of 
the shareholder under subsection (a)(2)(A), or 
‘‘(B) any distribution received by the 
shareholder which is properly attributable to 
such increased subpart F income. 
‘‘(2) DENIAL
OF
DEDUCTION.—No deduction 
shall be allowed under this chapter to a United 
States shareholder of a controlled foreign corpora-
tion for any tax for which a credit is not allowable 
under section 901 by reason of paragraph (1). 
‘‘(3) DEDUCTIBLE PORTION.—For purposes of 
this subsection, the term ‘deductible portion’ means, 
with respect to the increased subpart F income of 
the corporation included in the gross income of the 
shareholder under subsection (a)(2)(A), the applica-
ble percentage of such income with respect to which 
a deduction is allowable under subsection (a)(2)(B). 
‘‘(4) COORDINATION WITH SECTION 78.—Sec-
tion 78 shall not apply to the portion of any tax for 
which credit is not allowable under section 901 by 
reason of paragraph (1). 
‘‘(d) APPLICABLE PERCENTAGE.—For purposes of 
this section, the term ‘applicable percentage’ means the 
percentage which is equal to the ratio of— 
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147 
‘‘(1) the excess of— 
‘‘(A) the highest rate of tax in effect under 
section 11(b) for the taxable year of the United 
States shareholder described in subsection 
(a)(2)(B), over 
‘‘(B) 20 percent, to 
‘‘(2) the highest rate of tax in effect under sec-
tion 11(b) for the taxable year of the United States 
shareholder described in subsection (a)(2)(B). 
The percentage determined under the preceding sentence 
shall be rounded to the nearest whole percentage point. 
‘‘(e) ELECTION TO PAY LIABILITY
IN INSTALL-
MENTS.— 
‘‘(1) IN GENERAL.—In the case of a United 
States shareholder with respect to one or more con-
trolled foreign corporations to which subsection (a) 
applies, such United States shareholder may elect to 
pay the net tax liability under this section in 2 or 
more (but not exceeding 8) equal installments. 
‘‘(2) DATE FOR PAYMENT OF INSTALLMENTS.— 
If an election is made under paragraph (1), the due 
date for the first installment shall be the due date 
(determined without regard to any extension of time 
for filing the return) for the return of tax for the 
taxable year described in subsection (a)(2)(B) and 
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148 
the due date for each succeeding installment shall be 
the due date (as so determined) for the return of tax 
for the taxable year following the taxable year with 
respect to which the preceding installment was 
made. 
‘‘(3) ACCELERATION
OF
PAYMENT.—If there 
is— 
‘‘(A) an assessment of an addition to tax 
for failure to pay timely with respect to any in-
stallment required under this subsection, 
‘‘(B) a liquidation or sale of substantially 
all the assets of the taxpayer (including in a 
title 11 or similar case), 
‘‘(C) a cessation of business by the tax-
payer, or 
‘‘(D) any similar circumstance, 
then the unpaid portion of all remaining installments 
shall be due on the date of such event (or in the case 
of a title 11 or similar case, the day before the peti-
tion is filed). 
‘‘(4) PRORATION OF DEFICIENCY TO INSTALL-
MENTS.—If an election is made under paragraph (1) 
to pay the net tax liability under this section in in-
stallments and a deficiency has been assessed, the 
deficiency shall be prorated to the installments pay-
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149 
able under paragraph (1). The part of the deficiency 
so prorated to any installment the date for payment 
of which has not arrived shall be collected at the 
same time as, and as a part of, such installment. 
The part of the deficiency so prorated to any install-
ment the date for payment of which has arrived 
shall be paid upon notice and demand from the Sec-
retary. This paragraph shall not apply if the defi-
ciency is due to negligence, to intentional disregard 
of rules and regulations, or to fraud with intent to 
evade tax. 
‘‘(5) RULES RELATING TO INTEREST.— 
‘‘(A) IN GENERAL.—In the case of any net 
tax liability prorated to an installment under 
this subsection, the last date prescribed for pay-
ment of the tax for purposes of section 6601(a) 
shall be the last date for payment of the install-
ment rather than the last date for payment of 
tax for the taxable year in which the net tax li-
ability arose. 
‘‘(B) 
SPECIAL
RULES
FOR
DEFI-
CIENCIES.— 
‘‘(i) INTEREST PAYABLE FOR ENTIRE 
PERIOD.—Subparagraph 
(A) 
shall 
not 
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150 
apply to any deficiency prorated to an in-
stallment under paragraph (4). 
‘‘(ii) PAYMENT OF INTEREST ATTRIB-
UTABLE TO PRIOR PERIODS.—In the case 
of a deficiency to which paragraph (4) ap-
plies, interest with respect to such defi-
ciency which is assigned under paragraph 
(4) to any installment the date for pay-
ment of which has arrived on or before the 
date of the assessment of the deficiency, 
shall be paid upon notice and demand from 
the Secretary. 
‘‘(6) 
PERIOD
OF
ASSESSMENT.—Notwith-
standing section 6501, the period for assessing the 
net tax liability under this section for which an elec-
tion is made under paragraph (1) shall not expire 
before the due date for the last installment. 
‘‘(7) ELECTION.—Any election under paragraph 
(1) shall be made not later than the due date for the 
return of tax for the taxable year of the United 
States shareholder described in subsection (a)(2)(B) 
and shall be made in such manner as the Secretary 
may provide. 
‘‘(8) NET
TAX
LIABILITY
UNDER
THIS
SEC-
TION.—For purposes of this subsection— 
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151 
‘‘(A) IN GENERAL.—The net tax liability 
under this section with respect to any United 
States shareholder is the excess (if any) of— 
‘‘(i) such taxpayer’s net income tax 
for the taxable year, over 
‘‘(ii) such taxpayer’s net income tax 
for such taxable year determined without 
regard to this section. 
‘‘(B) NET INCOME TAX.—The term ‘net 
income tax’ means the net income tax (as de-
fined in section 38(c)(1)) reduced by the credit 
allowed under section 38. 
‘‘(C) REGULATIONS.—The Secretary shall 
prescribe such regulations as may be necessary 
for the determination under this subsection of 
the net tax liability under this section in the 
case of any pass-thru entity. 
‘‘(f) REGULATIONS.—The Secretary shall promulgate 
such regulations as necessary to carry out the purposes 
of this section, including regulations for the application 
of this section to pass-through entities all or part of which 
are owned by 1 or more domestic corporations.’’. 
(b) ORDERING RULE FOR PURPOSES OF TREATMENT 
OF PREVIOUSLY TAXED INCOME.— 
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152 
(1) IN GENERAL.—Section 959 is amended by 
adding at the end the following new subsection: 
‘‘(g) SPECIAL ORDERING RULE.—Notwithstanding 
subsection (c), for purposes of subsections (a) and (b), sec-
tion 316(a) shall be applied by applying paragraph (2) 
thereof and then paragraph (1) thereof— 
‘‘(1) first to the deductible portion (as defined 
in section 966(c)(3)) of the increase in subpart F in-
come described in section 966(a)(1) included in the 
gross income of United States shareholders under 
section 951(a)(1) (after application of section 
966(a)(2)(A)), and 
‘‘(2) then to amounts described in paragraph 
(1), (2), or (3) of subsection (c).’’. 
(2) 
CONFORMING
AMENDMENT.—Section 
959(c) is amended by inserting ‘‘except as provided 
in subsection (g),’’ after ‘‘subsections (a) and (b),’’. 
(c) CONFORMING AMENDMENTS.— 
(1) Clause (vi) of section 56(g)(4)(C) is amend-
ed— 
(A) by inserting ‘‘or section 966(a)’’ after 
‘‘section 965’’, and 
(B) by inserting ‘‘AND INCLUSIONS’’ after 
‘‘CERTAIN
DISTRIBUTIONS’’ in the heading 
thereof. 
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153 
(2) Paragraph (3) of section 245(a) is amend-
ed— 
(A) by striking ‘‘post-1986’’ in subpara-
graph (A), and 
(B) by striking ‘‘total post-1986’’ in sub-
paragraph (B). 
(3) Paragraph (4) of section 245(a) is amended 
to read as follows: 
‘‘(4) UNDISTRIBUTED
EARNINGS.—The term 
‘undistributed earnings’ means the amount of the 
earnings and profits of the controlled foreign cor-
poration (computed in accordance with sections 
964(a) and 986)— 
‘‘(A) as of the close of the taxable year of 
the controlled foreign corporation in which the 
dividend is distributed, and 
‘‘(B) without diminution by reason of divi-
dends distributed during such taxable year.’’. 
(4) Paragraph (5) of section 245(a) is amend-
ed— 
(A) by striking ‘‘post-1986’’ both places it 
appears in the matter preceding subparagraph 
(A), and 
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154 
(B) by striking ‘‘POST-1986 UNDISTRIB-
UTED’’ in the heading thereof and inserting 
‘‘UNDISTRIBUTED’’. 
(5) Paragraph (6) of section 245(a) is amend-
ed— 
(A) by striking ‘‘beginning after December 
31, 1986’’ and inserting ‘‘which is after the 
first taxable year of such corporation’’, and 
(B) by striking ‘‘post-1986’’ both places it 
appears. 
(6) Paragraph (2) of section 6601(b) is amend-
ed— 
(A) by striking ‘‘section 6156(a)’’ in the 
matter preceding subparagraph (A) and insert-
ing ‘‘section 965(d)(1) or 6156(a)’’, and 
(B) by striking ‘‘section 6156(b)’’ in sub-
paragraph (A) and inserting ‘‘section 965(d)(2) 
or 6156(b), as the case may be’’. 
(7) The table of sections for subpart F of part 
III of subchapter N of chapter 1 is amended by 
striking the item relating to section 965 and insert-
ing the following: 
‘‘Sec. 966. Inclusion of previously deferred foreign income.’’. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in para-
graph (2), the amendments made by this section 
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155 
shall apply to the last taxable year of foreign cor-
porations beginning before the applicable date, and 
to taxable years of United States shareholders with 
or within which such taxable years of foreign cor-
porations end. 
(2) CONFORMING
AMENDMENTS
RELATED
TO 
SECTION
245.—The amendments made by para-
graphs (2), (3), (4), and (5) of subsection (c) shall 
apply to taxable years of foreign corporations begin-
ning on or after the applicable date, and to taxable 
years of United States shareholders with or within 
which such taxable years of foreign corporations 
end. 
Subpart B—Other Provisions 
SEC. 336. ELIMINATION OF 30-DAY REQUIREMENT. 
(a) IN GENERAL.—Section 951(a)(1) is amended by 
striking ‘‘for an uninterrupted period of 30 days or more’’ 
and inserting ‘‘at any time’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years of foreign corpora-
tions beginning on or after the applicable date, and to tax-
able years of United States shareholders with or within 
which such taxable years of foreign corporations end. 
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156 
SEC. 337. MODIFICATION OF DEFINITION OF UNITED 
STATES SHAREHOLDER. 
(a) IN GENERAL.—Section 951(b) is amended by in-
serting ‘‘, or 10 percent or more of the total value of 
shares of all classes of stock of such foreign corporation’’ 
after ‘‘such foreign corporation’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to taxable years of foreign corpora-
tions beginning on or after the applicable date, and to tax-
able years of United States shareholders with or within 
which such taxable years of foreign corporations end. 
Subtitle B—Reform of Foreign Tax 
Credit Provisions 
SEC. 341. REPEAL OF SECTION 902 INDIRECT FOREIGN TAX 
CREDITS; FOREIGN TAX CREDIT RELATED TO 
SUBPART F INCOME. 
(a) REPEAL OF SECTION 902 INDIRECT FOREIGN 
TAX CREDITS.—Subpart A of part III of subchapter N 
of chapter 1 is amended by striking section 902. 
(b) FOREIGN TAX CREDIT RELATED TO SUBPART F 
INCOME.— 
(1) IN GENERAL.—Section 960 is amended by 
redesignating subsections (b) and (c) as subsections 
(c) and (d), respectively, and by striking subsection 
(a) and inserting the following: 
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157 
‘‘(a) DETERMINATION
OF CREDIT
ON CURRENT 
YEAR BASIS.—For purposes of this subpart, if there is 
included in the gross income of a domestic corporation any 
amount under section 951(a) with respect to any con-
trolled foreign corporation with respect to which such do-
mestic corporation is a United States shareholder, such 
domestic corporation shall be deemed to have paid so 
much of such foreign corporation’s foreign income taxes 
as are properly attributable to the amount so included. 
‘‘(b) TREATMENT OF FOREIGN TAXES NOT PRE-
VIOUSLY DEEMED PAID.—For purposes of this subpart— 
‘‘(1) IN GENERAL.—If any portion of a dis-
tribution from a controlled foreign corporation re-
ceived by a domestic corporation is excluded from 
gross income under section 959(a), such domestic 
corporation shall be deemed to have paid so much of 
such foreign corporation’s foreign income taxes as 
are properly attributable to the amount so excluded 
to the extent such taxes were not deemed paid by 
the domestic corporation under this section for any 
prior taxable year. 
‘‘(2) TAXES OF LOWER-TIER CFCS.—If a con-
trolled foreign corporation receives a distribution 
any portion of which is described in section 959(b) 
from another controlled foreign corporation, such 
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158 
foreign corporation shall be deemed to have paid so 
much of such other foreign corporation’s foreign in-
come taxes as are properly attributable to the 
amount so described to the extent such taxes were 
not deemed paid by a domestic corporation under 
this section for any prior taxable year.’’. 
(2) APPLICATION WITH RESPECT TO FOREIGN 
TAX CREDIT LIMITATION.—Section 960(c), as redes-
ignated by paragraph (1), is amended by adding at 
the end the following new paragraph: 
‘‘(6) APPLICATION WITH RESPECT TO FOREIGN 
TAX CREDIT LIMITATION.—This subsection shall be 
applied separately with respect to each category of 
income described in section 904(d)(1).’’. 
(3) CONFORMING AMENDMENTS.— 
(A) Section 960 is amended by striking 
subsection (d), as redesignated by paragraph 
(1), and inserting the following: 
‘‘(d) FOREIGN INCOME TAXES.—For purposes of this 
section, the term ‘foreign income taxes’ means any income, 
war profits, or excess profits taxes paid or accrued by a 
foreign corporation to any foreign country or possession 
of the United States. 
‘‘(e) REGULATIONS.—The Secretary shall provide 
such regulations as may be necessary or appropriate to 
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159 
carry out the provisions of this section, including rules for 
the application of this section to domestic partnerships 
with partners that are domestic corporations.’’. 
(B) Section 960 is amended by striking the 
heading and inserting ‘‘DEEMED PAID CRED-
IT FOR SUBPART F INCLUSIONS’’. 
(c) MODIFICATION TO SECTION 78 GROSS UP.—Sec-
tion 78 is amended to read as follows: 
‘‘SEC. 78. AMOUNTS RECEIVED FROM CERTAIN FOREIGN 
CORPORATIONS 
BY 
DOMESTIC 
CORPORA-
TIONS CHOOSING FOREIGN TAX CREDIT. 
‘‘If a domestic corporation which is a United States 
shareholder chooses to have the benefits of subpart A of 
part III of subchapter N (relating to foreign tax credits) 
for any taxable year, an amount equal to the taxes deemed 
to be paid by such corporation under section 960 for such 
taxable year— 
‘‘(1) shall be treated as an amount included in 
the gross income under section 951(a), and 
‘‘(2) for purposes of section 904, shall be 
deemed to be attributable to the same category of 
income described in section 904(d)(1) as the income 
which gave rise to the taxes deemed paid by such 
corporation.’’. 
(d) CONFORMING AMENDMENTS.— 
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160 
(1) Subclause (III) of section 56(g)(4)(C)(iii) is 
amended by inserting ‘‘as in effect before its repeal’’ 
after ‘‘section 902’’. 
(2) Sections 535(b)(1) and 545(b)(1) are each 
amended by striking ‘‘section 902(a) or 960(a)(1)’’ 
and inserting ‘‘section 960’’. 
(3) Subparagraph (B) of section 814(f)(1) is 
repealed. 
(4) Subsection (a) of section 901 is amended by 
striking ‘‘sections 902 and 960’’ and inserting ‘‘sec-
tion 960’’. 
(5) Paragraph (2) of section 901(e) is amended 
by striking ‘‘but is not limited to—’’ and all that fol-
lows through ‘‘that portion’’ and inserting ‘‘but is 
not limited to that portion’’. 
(6) Subsection (f) of section 901 is amended by 
striking ‘‘sections 902 and 960’’ and inserting ‘‘sec-
tion 960’’. 
(7) Subparagraph (A) of section 901(j)(1) is 
amended by striking ‘‘902 or’’. 
(8) Subparagraph (A) of section 904(h)(10) is 
amended by striking ‘‘sections 902, 907, and 960’’ 
and inserting ‘‘sections 907 and 960’’. 
(9) Subsection (k) of section 904 is amended to 
read as follows: 
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161 
‘‘(k) CROSS REFERENCE.—For modification of limi-
tation under subsection (a) for purposes of determining 
the amount of credit which can be taken against the alter-
native minimum tax, see section 59(a).’’. 
(10) Paragraph (1) of section 905(c) is amend-
ed by striking the last sentence. 
(11) Subclause (I) of section 905(c)(2)(B) is 
amended by striking ‘‘902 or’’. 
(12) Subsection (a) of section 906 is amended 
by striking ‘‘(or deemed, under section 902, paid or 
accrued during the taxable year)’’. 
(13) Subsection (b) of section 906 is amended 
by striking paragraphs (4) and (5). 
(14) Subparagraph (B) of section 907(b)(2) is 
amended by striking ‘‘902 or’’. 
(15) Paragraph (3) of section 907(c) is amend-
ed— 
(A) by striking subparagraph (A) and re-
designating subparagraphs (B) and (C) as sub-
paragraphs (A) and (B), respectively, and 
(B) by striking ‘‘section 960(a)’’ in sub-
paragraph (A) (as so redesignated) and insert-
ing ‘‘section 960’’. 
(16) Paragraph (5) of section 907(c) is amend-
ed by striking ‘‘902 or’’. 
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162 
(17) Clause (i) of section 907(f)(2)(B) is 
amended by striking ‘‘902 or’’. 
(18) Subsection (a) of section 908 is amended 
by striking ‘‘902 or’’. 
(19) Paragraph (1) of section 958(a) is amend-
ed by striking ‘‘960(a)(1)’’ and inserting ‘‘960’’. 
(20) Subparagraph (B) of section 6038(c)(1) is 
amended by striking ‘‘sections 902 (relating to for-
eign tax credit for corporate stockholder in foreign 
corporation) and 960 (relating to special rules for 
foreign tax credit)’’ and inserting ‘‘section 960’’. 
(21) Paragraph (4) of section 6038(c) is 
amended by striking subparagraph (C). 
(22) The table of sections for subpart A of part 
III of subchapter N of chapter 1 is amended by 
striking the item relating to section 902. 
(23) The table of sections for part II of sub-
chapter B of chapter 1 is amended by striking 
‘‘Dividends’’ in the item relating to section 78 and 
inserting ‘‘Amounts’’. 
(24) The table of sections for subpart F of part 
III of subchapter N of chapter 1 is amended by 
striking the item relating to section 960 and insert-
ing the following: 
‘‘Sec. 960. Deemed paid credit for subpart F inclusions.’’. 
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(e) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years of foreign corpora-
tions beginning on or after the applicable date, and to tax-
able years of United States shareholders with or within 
which such taxable years of foreign corporations end. 
SEC. 342. REPEAL OF RULE SUSPENDING FOREIGN TAXES 
AND CREDITS UNTIL RELATED INCOME IS 
TAKEN INTO ACCOUNT. 
(a) IN GENERAL.—Subpart A of part III of sub-
chapter N of chapter 1 is amended by striking section 909. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 901(m)(1)(B) is amended by strik-
ing ‘‘a section 902 corporation (as defined in section 
909(d)(5))’’ and inserting ‘‘a controlled foreign cor-
poration (as defined in section 957(a))’’. 
(2) The table of sections of subpart A of part 
III of subchapter N of chapter 1 is amended by 
striking the item relating to section 909. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to foreign taxes paid or accrued 
in taxable years beginning on or after the applicable date. 
Æ 
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