The Internal Revenue Service has published a final version of a rule that may affect the income taxes of foreign life insurers that do business in the United States.[@@]

The final rule will let foreign life 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 owns less than 10% of the stock of a U.S. company, it can treat earnings on that stock as trade-related income, according to the preamble to the final rule.

If a foreign insurer owns at least 10% of the stock of a U.S. company, the foreign insurer will have to continue to treat earnings on that stock as general “fixed or determinable, annual or periodical income,” according to the preamble to a draft of the regulation that was published in June 2004.

In the past, foreign insurers with U.S. operations usually have had to treat all income earned on U.S. stocks as FDAP income, according to a discussion of the proposed regulation that appeared in the June 2004 preamble.

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

The IRS set the 10% threshold to distinguish between portfolio stock held to fund policyholder obligations and surplus requirements from investments in subsidiaries, according to IRS officials.

In some cases, foreign insurers may end up having to count more “foreign source” dividends or gains as income connected with their U.S. operations, according to the preamble to the final rule.

A copy of the final rule is on the Web at http://a257.g.akamaitech.net/7/257/2422/01jan20051800/edocket.access.gpo.gov/2005/05-19622.htm

A copy of the original draft is on the Web at http://www.irs.gov/pub/irs-regs/11730704.pdf