n-12-45.pdf

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Notice 2012-45

Treatment of Income from Certain Government Bonds for Purposes of the
Passive Foreign Investment Company Rules

SECTION 1. PURPOSE
This notice provides guidance regarding the treatment of certain
government bonds for purposes of determining whether a foreign corporation is a
passive foreign investment company (PFIC).
SECTION 2. BACKGROUND

Section 1297(a) provides that a PFIC is any foreign corporation if 75
percent or more of its gross income for the taxable year is passive income or the
average percentage of assets held by the corporation during the taxable year
which produce passive income or which are held for the production of passive
income is at least 50 percent. Section 1297(b)(1) provides that passive income
means any income which is of a kind which would be foreign personal holding
company income as defined in section 954(c), subject to the exceptions of
section 1297(b)(2). Under section 1297(b)(2)(A), the term “passive income” does
not include any income derived in the active conduct of a banking business by an
institution licensed to do business as a bank in the United States or, to the extent
provided in regulations, by any other corporation (active banking exception).
In Notice 89-81, 1989-2 C.B. 399, the Internal Revenue Service (IRS) and
the Department of the Treasury (Treasury Department) described rules that
would expand the active banking exception to certain foreign corporations not

licensed to do business as a bank in the United States, and identified the types of
banking activities that produce income excluded from passive income under the
active banking exception. In 1995, the IRS and the Treasury Department issued
proposed regulations on the active banking exception. Prop. Reg. §1.1296-4.
SECTION 3. QUALIFYING FOREIGN GOVERNMENT BONDS HELD BY
ACTIVE BANKS

Recent economic conditions have resulted in a shift in the assets held by
some non-U.S. financial institutions. As a result of these conditions, certain
financial institutions are holding government bonds at higher than historical
levels. These increased levels have raised an issue concerning the treatment of
these financial institutions, and specifically the treatment of government bonds,
under the PFIC rules.
This notice announces that, solely for purposes of section 1297 and the
taxable years provided in Section 4 of this notice, the income from Qualifying
Government Bonds held by an Active Bank qualifies for the active banking
exception.
For purposes of this notice, the following terms have the meanings set
forth below:
Active Bank
. For any taxable year set forth in Section 4 of this notice, an Active
Bank is a foreign corporation that:
(i) would not be a PFIC for such taxable year as a result of the application
of the active banking exception if the treatment of Qualifying Government Bonds
described in this Section 3 applied (and taking into account, if applicable, section
1297(c));

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(ii) was not in any prior taxable year beginning in the preceding five
calendar years a PFIC, in each case as a result of the application of the active
banking exception (taking into account, if applicable, the treatment of Qualifying
Government Bonds described in this Section 3 for taxable years set forth in
Section 4 of this notice and section 1297(c)); and
(iii) is, and was in each taxable year beginning in the preceding five
calendar years, a publicly traded corporation. For purposes of this notice, a
corporation will be treated as a publicly traded corporation if (1) one or more
classes of stock is regularly traded on a qualified exchange or other market
(within the meaning of §1.1296-2), or (2) at least 50 percent of the aggregate
vote and value of the shares in the corporation is owned directly or indirectly by
another corporation described in clause (1) of this subparagraph.
Qualifying Government Bond
. Qualifying Government Bond means a bond or
similar instrument that has been issued by the government of the country (or any
political subdivision, agency, instrumentality, or local authority thereof) under the
laws of which the Active Bank is created or organized.
SECTION 4. EFFECTIVE/APPLICABILITY DATE
This notice shall apply to taxable years of foreign corporations beginning
in 2011, 2012, and 2013.
SECTION 5. DRAFTING INFORMATION
The principal author of this notice is Kristine Crabtree of the Office of
Associate Chief Counsel (International). However, other personnel from the IRS
and the Treasury Department participated in its development. For further

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information regarding this notice, contact Ms. Crabtree at (202) 622-3840 (not a
toll-free call).