The Internal Revenue Service has proposed a regulation that could cut foreign insurers’ U.S. income taxes.[@@]

The proposed regulation would let foreign insurers that do business in the United States treat much of the income that their stock holdings generate as trade-related income.

If a foreign insurer owned less than 10% of the stock of a U.S. company, it could treat earnings on that stock as trade-related income.

If a foreign insurer owned at least 10% of the stock of a U.S. company, it would have to continue to treat earnings on that stock as general “fixed or determinable, annual or periodical income.”

Today, foreign insurers with U.S. operations usually have to treat all income earned on U.S. stocks as FDAP income, according to a discussion of the proposed regulation that appears in today’s issue of the Federal Register.

Tougher accounting rules and a higher tax rate often apply to FDAP income.

Mark Matthews, an IRS official, notes in the discussion of the proposed tax regulation that owning stock is part of insurers’ business.

“Insurance companies hold investment assets, such as stocks and bonds, to fund their obligations to policyholders and to meet their surplus (capital) requirements,” Matthews writes.

That means that stock held in a foreign insurer’s investment portfolio may be an asset held for use in the insurer’s trade or business, Matthews writes.

But, when a foreign insurer owns stock in a U.S. subsidiary, that stock is not an asset held to meet business needs, Matthews writes.

“The 10% threshold is intended to distinguish portfolio stock held to fund policyholder obligations and surplus requirements from investments in a subsidiary,” Matthews writes.

Comments on the proposed regulation are due Sept. 23.

A copy of the proposed regulation is on the Web at http://a257.g.akamaitech.net/7/257/2422/06jun20041800/edocket.access.gpo.gov/2004/pdf/04-14392.pdf