Qualifying insurance corporation
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(e) ***
(4) Corresponding adjustment to total assets.— For purposes of determining whether a foreign corporation satisfies the 25 percent test or the 10 percent test, the amount of total assets reported on the foreign corporation’s applicable financial statement may be reduced as described in paragraphs (e)(4)(i) through (iii) of this section.
(i) Consolidated applicable financial statement.— If a foreign corporation’s applicable financial statement is prepared on a consolidated basis, the amount of total assets may be reduced by the amount of liabilities of another entity that are reported on the applicable financial statement and would be treated as applicable insurance liabilities but for the application of paragraphs (e)(2) or (f)(2)(i)(D)(2) of this section.
(ii) Insurance risk transferred through reinsurance.— If the applicable financial statement is prepared on the basis of an accounting method that measures insurance liabilities without a reduction for amounts that may be recovered from other parties through reinsurance and the amount that may be recovered through reinsurance is reported as an asset on the applicable financial statement (rather than as a reduction in the amount of an insurance liability), the foreign corporation’s total assets may be reduced by the amount of the corporation’s insurance liabilities that are reinsured to another party and are excluded from the definition of applicable insurance liabilities under paragraph (f)(2)(i)(D)(3) of this section.
(iii) No amount may be used more than once to reduce total assets under paragraphs (e)(4)(i) and (ii) of this section.
(5) Example.— The following example illustrates the application of paragraph (e)(4) of this section.
(i) Facts. P, a foreign corporation, issues property and casualty insurance contracts and has a consolidated applicable financial statement (AFS) constructed using IFRS accounting principles, including those of IFRS 17, for the applicable reporting period. The AFS reports insurance contract liabilities for incurred claims that meet the requirements of paragraphs (f)(2)(i)(A) and (f)(2)(i)(B) of this section in an amount equal to 1,100x, 200x of which are liabilities under contracts issued by S, a wholly owned insurance subsidiary, and 900x of which are liabilities under contracts issued by P. The AFS also reports 2,500x of total assets, including 250x of assets related to P’s insurance contract liabilities for incurred claims that are recoverable from unrelated parties through reinsurance.
(ii) Results—
(A) Reduction to applicable insurance liabilities (AIL). Under paragraph (f)(2)(i)(D)(2) of this section, only AIL of the foreign corporation whose QIC status is being determined may be included in AIL. Thus, P’s AIL do not include the 200x of insurance contract liabilities on P’s consolidated AFS that are liabilities under contracts issued by S. Under paragraph (f)(2)(i)(D)(3) of this section, the amount of insurance liabilities determined under paragraphs (f)(2)(i)(A) through (C) and (D)(1) and (2) of this section are reduced by an amount equal to the assets reported on P’s AFS that represent amounts relating to those liabilities that may be recoverable from other parties through reinsurance. Thus, P’s AIL are reduced by an amount equal to the 250x of assets for incurred claims related to the insurance liabilities of P that are recoverable from another party through reinsurance. Assuming no other limitation applies (such as those contained in paragraph (e) of this section), P’s AIL equals 650x (1,100x-200x-250x).
(B) Reduction to total assets. Pursuant to paragraph (e)(4)(i) of this section, P may reduce its total assets by amounts of liabilities of another entity that are excluded from P’s AIL because of paragraphs (e)(2) or (f)(2)(i)(D)(2) of this section. Under paragraph (f)(2)(i)(D)(2) of this section, P’s AIL may include only the liabilities of P, the entity whose QIC status is being determined. Therefore, P may reduce its total assets by 200x, the amount of liabilities under contracts issued by S that are included on P’s AFS but excluded from P’s AIL. Pursuant to paragraph (e)(4)(ii) of this section, P may also reduce its total assets by 250x, the amount of P’s liabilities that are reinsured by another party and excluded from the definition of AIL under paragraph (f)(2)(i)(D)(3) of this section. After these adjustments, P has total assets of 2,050x (2,500x-200x-250x).
(C) AIL to total assets tests. Accordingly, for purposes of the 25 percent and 10 percent tests, P has AIL of 650x and total assets of 2,050x, for a test ratio of 650x/2,050x, or 31.7%.
(f) Definitions.— ***
(1) Applicable financial statement.— The term applicable financial statement means the foreign corporation’s financial statement prepared for the financial reporting purposes listed in paragraphs (f)(1)(i) through (iii) of this section that has the highest priority, including priority within paragraphs (f)(1)(i)(B) and (f)(1)(ii) of this section. Subject to paragraph (f)(1)(iv) of this section, the financial statements are, in order of descending priority—
(i) GAAP statements.— A financial statement that is prepared in accordance with GAAP and is:
(A) A Form 10–K (or successor form), or annual statement to shareholders, filed with the United States Securities and Exchange Commission (SEC), or filed by the taxpayer with an agency of a foreign government that is equivalent to the SEC, and has reporting standards not less stringent than the standards required by the SEC;
(B) An audited financial statement of the taxpayer that is used for:
(1) Credit purposes;
(2) Reporting to shareholders, partners, or other proprietors, or to beneficiaries;
(3) Filing with the Federal government or any Federal agency, other than the SEC or the Internal Revenue Service or an applicable insurance regulatory body, or filing with a state or foreign government or an agency of a state or foreign government, other than an agency that is equivalent to the SEC or the Internal Revenue Service or is an applicable insurance regulatory body; or
(4) Any other substantial non-tax purpose, including filing with the applicable insurance regulatory body; or
(ii) IFRS statements.— A financial statement that is prepared in accordance with IFRS and is described in paragraphs (f)(1)(i)(A) or (B) of this section, in the order of priority set forth in those paragraphs; or
(iii) Regulatory annual statement.— An audited financial statement required to be filed with the applicable insurance regulatory body that is not prepared in accordance with GAAP or IFRS.
(iv) Priority of financial statements.—
(A) A financial statement that takes into account assets and liabilities of affiliates of the foreign corporation that are not owned in whole or part by the foreign corporation is not treated as an applicable financial statement for purposes of paragraphs (f)(1)(i) and (ii) of this section, and is not treated as an applicable financial statement for purposes of paragraph (f)(1)(iii) of this section unless it is the only financial statement described in paragraph (f)(1)(iii) of this section.
(A) A financial statement that is described in more than one clause listed in paragraphs (f)(1)(i) through (iii) of this section is treated for purposes of this paragraph (f)(1) as described solely in the highest priority clause. If a foreign corporation has more than one financial statement with equal priority under paragraphs (f)(1)(i) through (iii) of this section, a non-consolidated financial statement has priority over other financial statements.
(2) Applicable insurance liabilities.— ***
(i) ***
(D) ***
(3) Amounts of liabilities determined under paragraphs (f)(2)(i)(A) through (C) and (D)(1) and (2) are reduced by an amount equal to the assets reported on the corporation’s financial statement as of the financial statement end date that represent amounts relating to those liabilities that may be recoverable from other parties through reinsurance. If a foreign corporation’s financial statement is prepared on a consolidated basis, to the extent not reduced already under paragraphs (f)(2)(i)(A) through (C) and (D)(1) and (2), liabilities are reduced by an amount equal to the assets relating to those liabilities that may be recoverable through reinsurance from another entity included in the consolidated financial statement, regardless of whether the reinsurance transaction is eliminated in the preparation of the consolidated financial statement.
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(6) Financial statements.—
(i) In general.— The term financial statement means a statement prepared for a legal entity for a reporting period in accordance with the rules of a financial accounting or statutory accounting standard that includes a complete balance sheet, statement of income, a statement of cash flows (or equivalent statements under the applicable reporting standard), and related exhibits, schedules, forms, and footnotes that usually accompany the balance sheet, income statement, and cash flow statement.
(ii) Consolidated and non-consolidated financial statement.— The term consolidated financial statement means a financial statement of a consolidated group of entities that includes a parent and its subsidiaries presented as those of a single economic entity, prepared in accordance with GAAP, IFRS, or another financial or statutory accounting standard. A non-consolidated financial statement means a financial statement that is not prepared on a consolidated basis and that accounts for investments in subsidiaries on a cost or equity basis.
(iii) Audited financial statement.— The term audited financial statement means a financial statement that has been examined by an independent auditor that has provided an opinion that the financial statement presents fairly in all material respects the financial position of the audited company (and its subsidiaries and controlled entities, if relevant) and the results of their operations and cash flows in accordance with GAAP or IFRS, or an equivalent opinion under GAAP, IFRS, or another financial accounting or statutory accounting standard.
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(g) Applicability date.—
(1) General applicability date.— Except as provided in paragraph (g)(2) of this section, this section applies to taxable years of shareholders beginning on or after January 14, 2021.
(2) Exception.— Paragraphs (e)(4), (e)(5), (f)(1), (f)(2)(i)(D)(3), and (f)(6) of this section apply to taxable years of United States persons that are shareholders in foreign corporations beginning on or after [the date these regulations are filed as final regulations in the Federal Register].
(3) Early application.—
(i) A shareholder may choose to apply the rules of this section (other than paragraphs (f)(1), (f)(2)(i)(D)(3), and (f)(6) of this section) for any open taxable year beginning after December 31, 2017 and before the applicability dates described in paragraphs (g)(1) and (2) of this section, provided that, with respect to a tested foreign corporation, it consistently applies those rules and the rules described in §1.1297-6(f)(3) for such year and all subsequent years.
(ii) A shareholder may choose to apply paragraphs (f)(1), (f)(2)(i)(D)(3), and (f)(6) of this section for any open taxable year beginning after December 31, 2017 and before [the date these regulations are filed as final regulations in the Federal Register], provided that, with respect to a tested foreign corporation, it consistently applies the rules of this section, §1.1297-5, and §1.1297-6 for such year and all subsequent years. [Prop. Reg. §1.1297-4.]
[Proposed 1-15-2021 (corrected 3-5-2021).]