
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC842]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
                    Subchapter L--Insurance Companies
 
               PART III--PROVISIONS OF GENERAL APPLICATION
 
Sec. 842. Foreign companies carrying on insurance business


(a) Taxation under this subchapter

    If a foreign company carrying on an insurance business within the 
United States would qualify under part I or II of this subchapter for 
the taxable year if (without regard to income not effectively connected 
with the conduct of any trade or business within the United States) it 
were a domestic corporation, such company shall be taxable under such 
part on its income effectively connected with its conduct of any trade 
or business within the United States. With respect to the remainder of 
its income which is from sources within the United States, such a 
foreign company shall be taxable as provided in section 881.

(b) Minimum effectively connected net investment income

                           (1) In general

        In the case of a foreign company taxable under part I or II of 
    this subchapter for the taxable year, its net investment income for 
    such year which is effectively connected with the conduct of an 
    insurance business within the United States shall be not less than 
    the product of--
            (A) the required United States assets of such company, and
            (B) the domestic investment yield applicable to such company 
        for such year.

                      (2) Required U.S. assets

        (A) In general

            For purposes of paragraph (1), the required United States 
        assets of any foreign company for any taxable year is an amount 
        equal to the product of--
                (i) the mean of such foreign company's total insurance 
            liabilities on United States business, and
                (ii) the domestic asset/liability percentage applicable 
            to such foreign company for such year.

        (B) Total insurance liabilities

            For purposes of this paragraph--
            (i) Companies taxable under part I

                In the case of a company taxable under part I, the term 
            ``total insurance liabilities'' means the sum of the total 
            reserves (as defined in section 816(c)) plus (to the extent 
            not included in total reserves) the items referred to in 
            paragraphs (3), (4), (5), and (6) of section 807(c).
            (ii) Companies taxable under part II

                In the case of a company taxable under part II, the term 
            ``total insurance liabilities'' means the sum of unearned 
            premiums and unpaid losses.

        (C) Domestic asset/liability percentage

            The domestic asset/liability percentage applicable for 
        purposes of subparagraph (A)(ii) to any foreign company for any 
        taxable year is a percentage determined by the Secretary on the 
        basis of a ratio--
                (i) the numerator of which is the mean of the assets of 
            domestic insurance companies taxable under the same part of 
            this subchapter as such foreign company, and
                (ii) the denominator of which is the mean of the total 
            insurance liabilities of the same companies.

                    (3) Domestic investment yield

        The domestic investment yield applicable for purposes of 
    paragraph (1)(B) to any foreign company for any taxable year is the 
    percentage determined by the Secretary on the basis of a ratio--
            (A) the numerator of which is the net investment income of 
        domestic insurance companies taxable under the same part of this 
        subchapter as such foreign company, and
            (B) the denominator of which is the mean of the assets of 
        the same companies.

                 (4) Election to use worldwide yield

        (A) In general

            If the foreign company makes an election under this 
        paragraph, such company's worldwide current investment yield 
        shall be taken into account in lieu of the domestic investment 
        yield for purposes of paragraph (1)(B).

        (B) Worldwide current investment yield

            For purposes of subparagraph (A), the term ``worldwide 
        current investment yield'' means the percentage obtained by 
        dividing--
                (i) the net investment income of the company from all 
            sources, by
                (ii) the mean of all assets of the company (whether or 
            not held in the United States).

        (C) Election

            An election under this paragraph shall apply to the taxable 
        year for which made and all subsequent taxable years unless 
        revoked with the consent of the Secretary.

                      (5) Net investment income

        For purposes of this subsection, the term ``net investment 
    income'' means--
            (A) gross investment income (within the meaning of section 
        834(b)), reduced by
            (B) expenses allocable to such income.

(c) Special rules for purposes of subsection (b)

    (1) Coordination with small life insurance company deduction

        In the case of a foreign company taxable under part I, 
    subsection (b) shall be applied before computing the small life 
    insurance company deduction.

                 (2) Reduction in section 881 taxes

        (A) In general

            The tax under section 881 (determined without regard to this 
        paragraph) shall be reduced (but not below zero) by an amount 
        which bears the same ratio to such tax as--
                (i) the amount of the increase in effectively connected 
            income of the company resulting from subsection (b), bears 
            to
                (ii) the amount which would be subject to tax under 
            section 881 if the amount taxable under such section were 
            determined without regard to sections 103 and 894.

        (B) Limitation on reduction

            The reduction under subparagraph (A) shall not exceed the 
        increase in taxes under part I or II (as the case may be) by 
        reason of the increase in effectively connected income of the 
        company resulting from subsection (b).

     (3) Adjustment to limitation on deduction for policyholder 
                dividends in the case of foreign mutual life 
                             insurance companies

        For purposes of section 809, the equity base of any foreign 
    mutual life insurance company as of the close of any taxable year 
    shall be increased by the excess of--
            (A) the required United States assets of the company 
        (determined under subsection (b)(2)), over
            (B) the mean of the assets held in the United States during 
        the taxable year.

       (4) Data used in determining domestic asset/liability 
                 percentages and domestic investment yields

        Each domestic asset/liability percentage, and each domestic 
    investment yield, for any taxable year shall be based on such 
    representative data with respect to domestic insurance companies for 
    the second preceding taxable year as the Secretary considers 
    appropriate.

(d) Regulations

    The Secretary shall prescribe such regulations as may be necessary 
or appropriate to carry out the purposes of this section, including 
regulations--
        (1) providing for the proper treatment of segregated asset 
    accounts,
        (2) providing for proper adjustments in succeeding taxable years 
    where the company's actual net investment income for any taxable 
    year which is effectively connected with the conduct of an insurance 
    business within the United States exceeds the amount required under 
    subsection (b)(1),
        (3) providing for the proper treatment of investments in 
    domestic subsidiaries, and
        (4) which may provide that, in the case of companies taxable 
    under part II of this subchapter, determinations under subsection 
    (b) will be made separately for categories of such companies 
    established in such regulations.

(Aug. 16, 1954, ch. 736, 68A Stat. 267; Mar. 13, 1956, ch. 83, 
Sec. 5(5), 70 Stat. 49; Pub. L. 86-69, Sec. 3(f)(1), June 25, 1959, 73 
Stat. 140; Pub. L. 89-809, title I, Sec. 104(i)(1), Nov. 13, 1966, 80 
Stat. 1561; Pub. L. 99-514, title X, Sec. 1024(c)(11), Oct. 22, 1986, 
100 Stat. 2408; Pub. L. 100-203, title X, Sec. 10242(a), Dec. 22, 1987, 
101 Stat. 1330-420; Pub. L. 100-647, title II, Sec. 2004(q)(2), (3), 
Nov. 10, 1988, 102 Stat. 3609; Pub. L. 101-239, title VII, 
Sec. 7821(d)(2), Dec. 19, 1989, 103 Stat. 2424.)


                               Amendments

    1989--Subsec. (c)(4). Pub. L. 101-239 substituted ``yields'' for 
``yeilds'' in heading.
    1988--Subsec. (b)(3)(B). Pub. L. 100-647, Sec. 2004(q)(2)(A), struck 
out ``held for the production of such income'' after ``same companies''.
    Subsec. (b)(4)(B)(ii). Pub. L. 100-647, Sec. 2004(q)(2)(B), struck 
out ``held for the production of investment income'' after ``United 
States)''.
    Subsec. (d)(4). Pub. L. 100-647, Sec. 2004(q)(3), added par. (4).
    1987--Pub. L. 100-203 substituted ``companies'' for ``corporations'' 
in section catchline and amended text generally. Prior to amendment, 
text read as follows: ``If a foreign corporation carrying on an 
insurance business within the United States would qualify under part I 
or II of this subchapter for the taxable year if (without regard to 
income not effectively connected with the conduct of any trade or 
business within the United States) it were a domestic corporation, such 
corporation shall be taxable under such part on its income effectively 
connected with its conduct of any trade or business within the United 
States. With respect to the remainder of its income, which is from 
sources within the United States, such a foreign corporation shall be 
taxable as provided in section 881.''
    1986--Pub. L. 99-514 struck out reference to part III of this 
subchapter.
    1966--Pub. L. 89-809 substituted provisions covering the taxability 
of foreign corporations that are carrying on an insurance business 
within the United States which would qualify under part I, II, or III of 
this subchapter for the taxable year if (without regard to income not 
effectively connected with the conduct of any trade or business within 
the United States) it were a domestic corporation for provisions that 
the gross income of insurance companies subject to the tax imposed by 
section 802 or 831 shall not be determined in the manner provided in 
part I of subchapter N (relating to determination of sources of income).
    1959--Pub. L. 86-69 struck out reference to section 811.
    1956--Act Mar. 13, 1956, inserted reference to section 811.


                    Effective Date of 1989 Amendment

    Amendment by Pub. L. 101-239 effective as if included in the 
provision of the Revenue Act of 1987, Pub. L. 100-203, title X, to which 
such amendment relates, see section 7823 of Pub. L. 101-239, set out as 
a note under section 26 of this title.


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-647 effective, except as otherwise 
provided, as if included in the provisions of the Revenue Act of 1987, 
Pub. L. 100-203, title X, to which such amendment relates, see section 
2004(u) of Pub. L. 100-647, set out as a note under section 56 of this 
title.


                    Effective Date of 1987 Amendment

    Amendment by Pub. L. 100-203 applicable to taxable years beginning 
after Dec. 31, 1987, see section 10242(d) of Pub. L. 100-203, set out as 
a note under section 816 of this title.


                    Effective Date of 1986 Amendment

    Amendment by Pub. L. 99-514 applicable to taxable years beginning 
after Dec. 31, 1986, see section 1024(e) of Pub. L. 99-514, set out as a 
note under section 831 of this title.


                    Effective Date of 1966 Amendment

    Amendment by Pub. L. 89-809 with respect to taxable years beginning 
after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as a 
note under section 11 of this title.


                    Effective Date of 1959 Amendment

    Amendment by Pub. L. 86-69 applicable only with respect to taxable 
years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set 
out as a note under section 381 of this title.


                    Effective Date of 1956 Amendment

    Amendment by act Mar. 13, 1956, applicable only to taxable years 
beginning after Dec. 31, 1954, see section 6 of act Mar. 13, 1956, set 
out as a note under section 316 of this title.


               Study of United States Reinsurance Industry

    Section 1244 of Pub. L. 99-514 directed Secretary of the Treasury or 
his delegate to conduct a study to determine whether United States 
reinsurance corporations are placed at a significant competitive 
disadvantage with foreign reinsurance corporations by existing treaties 
between the United States and foreign countries, and to report before 
Jan. 1, 1988, the results of such study to Committee on Finance of 
United States Senate and Committee on Ways and Means of House of 
Representatives.

                  Section Referred to in Other Sections

    This section is referred to in sections 816, 831, 848, 885, 1442 of 
this title.
