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February 3, 2022

US proposed regulations would expand scope of subpart F rules on related person insurance income

Executive summary

In proposed regulations (REG-118250-20) (the Proposed Regulations) issued 24 January 2022, the United States (US) Department of Treasury (Treasury) and the Internal Revenue Service (IRS) address, among other items, the subpart F regime on related person insurance income (RPII).The Proposed Regulations would expand the scope of relationships giving rise to RPII, repropose an anti-abuse rule addressing certain cross-insurance arrangements, and provide for aggregate treatment of pass-through entities to characterize income as RPII. This Tax Alert focuses on the effects of the Proposed Regulations on the insurance industry.

The Proposed Regulations generally would apply to tax years of foreign corporations beginning on or after the date finalized regulations are published in the Federal Register, and to tax years of US persons in which or with which those foreign corporations' tax years end. The proposed anti-abuse rule for cross-insurance arrangements would apply, if finalized, to foreign corporations' tax years ending on or after 25 January 2022; they would also apply to tax years of US persons in which or with which the foreign corporations' tax years end (without regard to when taxpayers enter into a cross-insurance arrangement).

Comments on the Proposed Regulations must be received by 25 April 2022.

Detailed discussion

RPII generally

A foreign corporation is a controlled foreign corporation (CFC) if one or more "United States shareholders" (each a US Shareholder) owns more than 50% of the foreign corporation's stock (by vote or value) either (1) directly or indirectly under Internal Revenue Code2 (IRC) Section 958(a), or (2) constructively under Section 958(b). A US shareholder of a foreign corporation is a US person that owns 10% or more of the foreign corporation's shares (by vote or value) either (1) directly or indirectly under Section 958(a), or (2) constructively under Section 958(b). A US Shareholder of a CFC must include in gross income its pro rata share of the CFC's subpart F income for the year. Subpart F income includes insurance income, which is generally defined as income that (1) is from the issuing (or reinsuring) of an insurance or annuity contract, and (2) would be taxed under subchapter L of the IRC if that income belonged to a domestic insurance company. Section 512(b)(17) generally treats a tax-exempt entity's subpart F insurance income as unrelated trade or business income to the extent the subpart F insurance income is attributable to insurance income that would qualify as unrelated trade or business income if derived by the tax-exempt entity directly.

The RPII rules in Section 953(c) generally broaden the definition of CFC and US Shareholder, thereby increasing the scope of US persons that must include their pro rata share of RPII in gross income. For purposes of taking into account RPII under the subpart F rules, a US Shareholder is a US person who owns any stock in a foreign corporation (directly or indirectly within the meaning of Section 958(a)) (an RPII US Shareholder). Also for this purpose, a foreign corporation is a CFC if it meets at least a 25% vote-or-value-ownership threshold by RPII US Shareholders when applying the definition of a CFC in Section 957(a) (an RPII CFC).

RPII is defined as insurance income from an insurance or reinsurance policy that (directly or indirectly) insures an RPII US Shareholder in the foreign corporation or a person related to an RPII US Shareholder. A person (Tested Person) is related to an RPII US Shareholder generally if, using the rules of Section 954(d)(3):

  • The Tested Person controls, or is controlled by, an RPII US Shareholder (using a 50% vote-or-value threshold)


  • Another person(s) controls both the RPII US Shareholder and the Tested Person

An entity's directors, officers or employees are deemed related to the entity if an insurance policy covers liability arising from performance of their services.

The statute provides three exceptions precluding application of the RPII provisions:

De Minimis Stock Exception: This exception applies where persons (directly or indirectly) insured by a foreign corporation, or persons related to the insureds, own (directly or indirectly) less than 20% (by vote and value) of the foreign corporation.

De Minimis RPII Exception: This exception applies where a foreign corporation's RPII (determined on a gross basis) is less than 20% of its insurance income for the tax year.3

ECI Election Exception: This exception applies where the foreign corporation elects to treat its RPII as effectively connected income (ECI) from a trade or business conducted in the US. The ECI Election Exception does not apply to a disqualified corporation, which is a foreign corporation that (1) is a CFC for at least 30 consecutive days during a tax year, and (2) has a US Shareholder that owns (directly or indirectly within the meaning of Section 958(a)) stock in the corporation at some point during the tax year.

Proposed regulations under Section 953 were previously issued in 1991, but the provisions on RPII, among others, were not finalized (the 1991 Proposed Regulations).4 The 1991 Proposed Regulations include, among other provisions, general rules for determining RPII and definitions that apply for purposes of the RPII regime. A special exception included in the 1991 Proposed Regulations (the Proposed Public Company Exception) would treat a US person as not being an RPII US Shareholder of a foreign corporation (the Potential RPII CFC), despite otherwise meeting the definition, if:

  • The US person indirectly owns stock in the Potential RPII CFC by reason of owning stock in a publicly traded foreign corporation that owns (directly or indirectly) stock in the RPII CFC
  • The US person is not (directly or indirectly) insured by the Potential RPII CFC and is not related to any person that is (directly or indirectly) insured by the Potential RPII CFC
  • The US person owns less than 5% of the vote and value of the publicly traded corporation's stock
  • The stock of the Potential RPII CFC owned (directly or indirectly) by the publicly traded corporation constitutes less than 5% of the gross value of that corporation's assets

Proposed Regulations

Aggregate approach applied to domestic partnerships

Consistent with final regulations (TD 9960) on the treatment of domestic partnerships under subpart F (see Tax Alert 2022-9001), the Proposed Regulations would not treat a domestic partnership as an RPII US Shareholder for purposes of characterizing income as RPII. A domestic partnership that otherwise meets the definition of an RPII US Shareholder would continue to be treated as such for purposes of determining (1) the status of a foreign corporation as an RPII CFC, or (2) whether the ECI Election Exception is unavailable because the foreign corporation is a disqualified corporation.5

Expanded scope of relationships giving rise to RPII

The Proposed Regulations would define RPII as "premium and investment income attributable to an annuity, insurance, or reinsurance policy that directly or indirectly provides coverage to a related insured."

A "related insured" would be any one of the following four types of persons:

  1. An RPII US Shareholder

  2. A person that is related to an RPII US Shareholder (using the statute's definition of related person, as discussed previously)

  3. A pass-through entity, if a related insured (other than a pass-through entity) indirectly owns stock in the RPII CFC through the pass-through entity or

  4. A person (other than a publicly traded corporation or partnership) that is more than 50% owned by RPII US Shareholders of the RPII CFC (a Majority US-Owned Person).

The first two types of persons treated as related insureds mirror the statutory framework for determining RPII.

The inclusion of a pass-through entity as a related insured would define a specific class of relationships with pass-through entities that may give rise to RPII. If a related insured (other than a pass-through entity) indirectly owns stock in an RPII CFC through a pass-through entity, the pass-through entity would be treated as a related insured. The Proposed Regulations define pass-through entity as an S corporation or a foreign or domestic partnership (other than a publicly traded partnership). When a pass-through entity is a related insured and the RPII CFC (directly or indirectly) provides the pass-through entity coverage, the RPII would be based on the portion of the premium that is (1) paid by the pass-through entity and (2) allocated to related insureds (other than pass-through entities) that indirectly own stock in the RPII CFC through the pass-through entity.

The Proposed Regulations would significantly expand the scope of relationships giving rise to RPII by treating a Majority US-Owned Person as a related insured. A person (other than a publicly traded corporation or partnership) is a Majority US-Owned Person if RPII US Shareholders collectively own (using direct, indirect and constructive ownership principles in Section 958(a) and (b)) (1) more than 50% of the stock in the person if it is a corporation, (2) more than 50% of the capital and profits interests if the person is a partnership, or (3) more than 50% of the interests if the person is a trust or estate.

The following example demonstrates how the RPII rules may apply to US minority shareholders of a foreign-parented group under the Proposed Regulations due to the presence of a Majority US-Owned Person.

Example: Publicly traded foreign parent corporation (FP) wholly owns a foreign reinsurance company (FRC) and a foreign insurance company (FIC). The gross value of FRC's stock represents 30% of the gross value of all assets owned by FP. FP is widely held with no single shareholder owning more than 2% of FP's shares. Collectively, US persons account for 55% of FP's ownership. FRC reinsures certain business of FIC.

Under current law and the Proposed Regulations, each of the US investors are RPII US Shareholders in FRC because each US investor indirectly owns a proportionate share of FRC stock owned by FP. FRC is an RPII CFC because 55% of FRC's stock is owned (indirectly) by RPII US Shareholders.

Under current law, FRC's premium and investment income from the FIC reinsurance contract is not RPII because (1) FIC is not an RPII US Shareholder in FRC; and (2) no RPII US Shareholder is a related person to FIC.

Under the Proposed Regulations, FIC is a Majority US-Owned Person because 55% of FIC's stock, collectively, is owned indirectly by RPII US Shareholders. Consequently, FIC is a related insured; because FIC has entered into a reinsurance contract with FRC, FRC's premium and investment income from the contract is RPII. Absent the De Minimis Income Exception or ECI Election Exception, each US investor would be required to include in gross income its pro rata share of FRC's RPII.The Proposed Public Company Exception would not apply because FRC stock represents more than 5% of the gross value of FP's assets.

According to the Preamble to the Proposed Regulations, including a Majority US-Owned Person as a related insured is intended to prevent the avoidance of RPII when the insured is held by multiple RPII US Shareholders (or their affiliates), and is authorized under the anti-avoidance rule in Section 953(c)(8)(A).7

Anti-abuse rule for "cross-insurance arrangements"

The Proposed Regulations would replace the anti-abuse rule in the 1991 Proposed Regulations addressing "cross-insurance arrangements" with a new anti-abuse rule. Under the Proposed Regulations, RPII would include insurance income from an arrangement (or a substantially similar arrangement with a similar degree of cooperative risk sharing) in which (1) a foreign corporation issues an insurance, reinsurance or annuity contract to someone other than a related insured, and (2) as part of the arrangement (involving one or more other persons), another person issues an insurance, reinsurance or annuity contract to a related insured of the foreign corporation.

To illustrate this rule, the Proposed Regulations include the following example:

Example: RPII CFC X is owned by 30 unrelated RPII US Shareholders. RPII CFC Y is owned by 30 unrelated RPII US Shareholders (that is, unrelated to X and Y and their shareholders). X agrees to provide insurance protection to Y's shareholders, and Y agrees to provide insurance to X's shareholders.

The example then states "[t]he insurance income of both X and Y that is attributable to insuring the shareholders of the other corporation constitutes [RPII]."

Request for comments

Treasury and the IRS specifically requested comments on the following topics in the RPII rules:

  • Whether the final regulations should treat a US person that holds an option to acquire stock (or another non-stock interest) in an RPII CFC as a related insured

  • How to apply aggregate principles to RPII, including revisions to forms and instructions to facilitate information sharing and reporting among RPII US Shareholders, RPII CFCs and partnerships

  • Provisions in the 1991 Proposed Regulations generally, including whether other parts should be reproposed, such as the Proposed Public Company Exception


The treatment of Majority US-Owned Persons and certain pass-through entities as "related insureds" would significantly affect foreign-parented insurance groups that engage in routine global risk management through reinsurance and have predominantly US investors, regardless of whether the group has US affiliates engaging in reinsurance. The scope of relationships that may give rise to RPII under the Proposed Regulations would extend well past what the statute provides. Taxpayers are strongly encouraged to assess their structures under the Proposed Regulations. Prior positions taken that the RPII rules do not apply to US investors should be revisited and analyzed if the Proposed Regulations are finalized.

The proposed anti-abuse rule for cross-insurance arrangements should be carefully considered in light of its apparent breadth of application. The proposed rule does not define or provide guidance on what constitutes an "arrangement." Similarly, the example in the Proposed Regulations does not explicitly assume that the agreements for X and Y to provide insurance to shareholders of Y and X, respectively, were part of a plan or "arrangement." Such insurance agreements could arise independently as a part of commercial practice, raising questions as to whether independent commercial agreements could be subject to the anti-abuse rule and treated as a cross-insurance arrangement.

The request for comments on not only specific aspects of the Proposed Regulations but also on the 1991 Proposed Regulations generally suggests that Treasury and the IRS have renewed interest in providing guidance under the RPII rules. The request for comments on whether final regulations should include a rule that would treat a US person holding an option to acquire stock (or other "non-stock interest") in an RPII CFC as a related insured is noteworthy; if such a rule were adopted, the scope of relationships giving rise to RPII would expand even further under constructive ownership principles.

Taxpayers should consider commenting on the Proposed Regulations as well as responding to the request for comments on the 1991 Proposed Regulations.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), Financial Services Organization – International Tax and Transaction Services



  1. Guidance on Passive Foreign Investment Companies and Controlled Foreign Corporations Held by Domestic Partnerships and S Corporations and Related Person Insurance Income, 87 Fed. Reg. 3890 (January 25, 2022).

  2. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.
  3. Section 953(c)(3)(B). By its terms, application of this exception requires determining the foreign corporation's insurance income "without regard to those provisions of [IRC Section 953(a)(1)] which limit insurance income to income from countries other than the country in which the corporation was created or organized." The reference to Section 953(a)(1) has not been updated to reflect a statutory amendment that was made permanent in 2015 and relocated the exception to subpart F insurance income from paragraph (a)(1) to paragraph (a)(2).
  4. Insurance Income of a Controlled Foreign Corporation for Taxable Years Beginning After December 31, 1986, 56 Fed. Reg. 15540 (April 17, 1991).

  5. The Proposed Regulations would also treat a domestic partnership as a US person for purposes of Section 953(d)(1)(A).

  6. The De Minimis Ownership Exception, as defined in the statute, does not apply because 100% of FRC stock is owned by FP, a related person to an insured (FIC).

  7. Section 958(c)(8)(A) authorizes Treasury to "prescribe such regulations as may be necessary to carry out the purposes of this subsection, including … regulations preventing the avoidance of this subsection through cross insurance arrangements or otherwise … ."


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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