--- kind: "range" citation: "26 C.F.R. §§ 1.953-1–1.953-6" title: "26" from: "1.953-1" to: "1.953-6" count: 6 url: "https://uscodex.org/cfr/26/1.953-1..1.953-6" --- # §1.953-1. Income from insurance of United States risks. - (a) **In general.** The [subpart F](/cfr/26/subpartF.md) income of a controlled foreign corporation for any taxable year includes its income derived from the insurance of United States risks for such taxable year. See [section 952(a)(1)](/cfr/26/952.md?p=a-1). A controlled foreign corporation shall have income derived from the insurance of United States risks for such purpose of it has taxable income, as determined under [§ 1.953-4](/cfr/26/1.953-4.md) or [§ 1.953-5](/cfr/26/1.953-5.md), which is attributable to the reinsuring or the issuing of any insurance or annuity contract in connection with United States risks, as defined in [§ 1.953-2](/cfr/26/1.953-2.md) or [§ 1.953-3](/cfr/26/1.953-3.md), and if it satisfies the 5-percent minimum premium requirement prescribed in [paragraph (b)](#b) of this section. It is immaterial for purposes of this section whether the person insured or the beneficiary of any insurance, annuity, or reinsurance contract is, as to such corporation, a related person or a United States shareholder. For definition of the term “controlled foreign corporation” for purposes of taking into account income derived from the insurance of United States risks under [section 953](/cfr/26/953.md), see section [957 (a)](/cfr/26/957.md?p=a) and [(b)](/cfr/26/957.md?p=b) and §§ [1.957-1](/cfr/26/1.957-1.md) and [1.957-2](/cfr/26/1.957-2.md). - (b) **5-percent minimum premium requirement.** A controlled foreign corporation shall not have income derived from the insurance of United States risks for purposes of this section unless the premiums received by such corporation during the taxable year which are attributable to the reinsuring and the issuing of insurance and annuity contracts in connection with the United States risks exceed 5 percent of the total premiums which are received by such corporation during such taxable year and which are attributable to the reinsuring and the issuing of insurance and annuity contracts in connection with all risks. - (c) **General definitions.** For purposes of [§§ 1.953-1 to 1.953-6](/cfr/26/1.953-1..1.953-6.md), inclusive— - (1) **Reinsurance, etc.** The terms “reinsurance”, “insurance”, and “annuity contract” have the same meaning which they have for purposes of applying [section 809(c)(1)](/cfr/26/809.md?p=c-1) or [section 832(b)(4)](/cfr/26/832.md?p=b-4), as the case may be. - (2) **Premiums.** The term “premiums” means the items taken into account for the taxable year under [section 809(c)(1)](/cfr/26/809.md?p=c-1), or the amount computed for the taxable year under [section 832(b)(4)](/cfr/26/832.md?p=b-4) without the application of subparagraph (B) thereof, as the case may be; except that, for purposes of determining the amount of premiums received in applying [paragraph (b)](#b) of this section or [paragraph (a)](/cfr/26/1.953-3.md?p=a) of § 1.953-3, advance premiums and deposits shall not be taken into account. - (3) **Insurance company.** The term “insurance company” has the same meaning which it has for purposes of applying [section 801(a)](/cfr/26/801.md?p=a), determined by applying the principles of [paragraph (a)](/cfr/26/1.801-3.md?p=a) of § 1.801-3. - (4) **Related person.** The term “related person”, when used with respect to a controlled foreign corporation, shall have the meaning assigned to it by [paragraph (e)](/cfr/26/1.954-1.md?p=e) of § 1.954-1. - (5) **Policy period.** With respect to any insurance or annuity contract under which a corporation is potentially liable at any time during its taxable year, the term “policy period” means with respect to such year each period of coverage under the contract if such period begins or ends with or within the taxable year, except that, if such period of coverage is more than one year, such term means such of the following periods as are applicable, each one of which is a policy period with respect to the taxable year: - (i) The one-year period which begins with the effective date of the contract and begins or ends with or within the taxable year, - (ii) The one-year period which begins with an anniversary of the contract and begins or ends with or within the taxable year, and - (iii) The period of less than one year if such period begins with an anniversary of the contract, ends with the date on which coverage under the contract terminates, and begins or ends with or within the taxable year. - (6) **Foreign country.** The term “foreign country” includes, where not otherwise expressly provided, a possession of the United States. # §1.953-2. Actual United States risks. - (a) **In general.** For purposes of [paragraph (a)](/cfr/26/1.953-1.md?p=a) of § 1.953-1, the term “United States risks” means risks described in [section 953(a)(1)(A)](/cfr/26/953.md?p=a-1-A)— - (1) In connection with property in the United States (as defined in [paragraph (b)](#b) of this section), - (2) In connection with liability arising out of activity in the United States (as defined in [paragraph (c)](#c) of this section), or - (3) In connection with the lives or health of residents of the United States (as defined in [paragraph (d)](#d) of this section). - (b) **Property in the United States.** The term “property in the United States” means property, as defined in [subparagraph (1)](#b-1) of this paragraph, which is in the United States, within the meaning of [subparagraph (2)](#b-2) of this paragraph. - (1) **Property defined.** The term “property” means any interest of an insured in tangible (including real and personal) or intangible property. Such interests include, but are not limited to, those of an owner, landlord, tenant, mortgagor, mortgagee, trustee, beneficiary, or partner. Thus, for example, if insurance is issued against loss from fire and theft with respect to an insured's home and its contents, such risks are risks in connection with property, whether the insured is the owner or lessee and whether the contents include furniture or cash and securities. Furthermore, if insurance is issued against all risks of damage or loss with respect to the automobile of an insured, such risks are risks in connection with property, whether the risks insured against may be caused by the insured, another person, or natural forces. - (2) **United States location—** - (i) **In general.** Property will be considered property in the United States when it is exclusively located in the United States. Conversely, property will be considered property not in the United States when it is exclusively located outside the United States. In addition, property which is ordinarily located in, but temporarily located outside, the United States will be considered property in the United States both when it is ordinarily located in, and when it is temporarily located outside, the United States if the premium which is attributable to the reinsuring or issuing of any insurance contract in connection with such property cannot be allocated to, or apportioned between, risks incurred when such property is actually located in the United States and risks incurred when it is actually located outside the United States. If such premium can be so allocated or apportioned on a reasonable basis, however, such property will be considered property not in the United States when it is actually located outside the United States. However, property will not be considered property in the United States if it is neither property which is exclusively located in the United States nor property which is ordinarily located in, but temporarily located outside, the United States. The rules prescribed in subdivision (ii) of this subparagraph shall apply in determining whether a premium can be allocated or apportioned on a reasonable basis to or between risks incurred when property is actually located in the United States and risks incurred when such property is actually located outside the United States. The rules prescribed in subdivisions (iii) through (x) of this subparagraph shall apply in determining whether property is, or will be considered, exclusively located in or outside the United States and whether property is, or will be considered, ordinarily located in the United States; such rules also limit the rule of premium allocation and apportionment prescribed in this subdivision and subdivision (ii) of this subparagraph. The determinations required by this subparagraph shall be made with respect to the location of property during the policy period applicable to the taxable year of the insuring or reinsuring corporation, or, if more than one policy period exists with respect to such taxable year, such determinations shall be made separately with respect to the location of property during each such policy period. - (ii) **Premium allocation or apportionment.** Whether a premium can be allocated or apportioned on a reasonable basis to or between risks incurred when property is actually located in the United States and risks incurred when such property is actually located outside the United States shall depend on the intention of the parties to the insurance contract, as determined from its provisions and the facts and circumstances preceding its execution. Contract provisions on the basis of which the premium reasonably may be so allocated or apportioned include, but are not limited to, provisions which separately describe each risk covered, the period of coverage of each risk, the special warranties for each risk, the premium for each risk (or the basis for determining such premium), and the conditions of paying the premium for each risk. For purposes of this subdivision, it shall be unnecessary formally to make a separate policy with respect to each risk covered or with respect to each clause attached to the policy, provided that the intention of the parties to the contract is reasonably clear. For example, if in the ordinary course of carrying on an insurance business an insurance policy is issued which covers fire, theft, and water damage risks incurred when property is actually located in the United States and marine risks incurred when such property is actually located outside the United States and which, pursuant to accepted insurance principles, properly describes the premium rates as percentages of the amount of coverage as “.825% plus .3% fire, etc. risks plus .12% water risks = 1.245%”, a reasonable basis exists to allocate a $124.50 premium paid for $10,000 of such coverage to $82.50 for foreign risks and $42.00 ($30.00 + $12.00) to United States risks. - (iii) **Property in general—(a) Ordinary and temporary location.** Except as otherwise provided in subdivisions (iv) through (x) of this subparagraph, the determination of whether property is ordinarily located in the United States will depend on all the facts and circumstances in each case. Property is ordinarily located in the United States if its location in the United States is regular, usual, or often occurring. However, in all cases property will be considered ordinarily located in the United States if it is actually located in the United States for an aggregate of more than 50 percent of the days in the applicable policy period whereas property will, under no circumstances, be considered ordinarily located in the United States if it is actually located in the United States for an aggregate of not more than 30 percent of the days in the applicable policy period. Property which is ordinarily located in the United States is temporarily located outside the United States when it is actually located outside the United States. For purposes of determining the number and percent of the days in an applicable policy period, the term “day” means, not any 24-consecutive-hour period, but a continuous period of twenty-four hours commencing from midnight and ending with the following midnight; in determining the location of property for such purposes, an amount of time which is at least one-half of such a day, but less than the entire day, shall be considered a day, and an amount of time which is less than one-half of such a day shall not be considered a day. (b) Illustrations. The application of this subdivision may be illustrated by the following examples: - (iv) **Commercial motor vehicles, ships, aircraft, railroad rolling stock, and containers.** Any motor vehicle, ship, aircraft, railroad rolling stock, or any container transported thereby, which is used exclusively in the commercial transportation of persons or property to or from the United States (including such transportation from one place to another in the United States) and is ordinarily located in the United States will be considered property in the United States both when such property is ordinarily located in, and when such property is temporarily located outside, the United States. Whether such property is used in the transportation of persons or property to or from the United States and is ordinarily located in the United States are issues to be determined from all the facts and circumstances in each case. However, in all cases such transportation property will be considered ordinarily located in the United States if either more than 50 percent of the miles traversed during the applicable policy period in the use of such property are traversed within the United States or such property is located in the United States more than 50 percent of the time during such period. Further, such transportation property will not at any time be considered property in the United States if either not more than 30 percent of the miles traversed during the applicable policy period in the use of such property are traversed within the United States or such property is located in the United States for not more than 30 percent of the time during such period. Nevertheless, if not more than 30 percent of the miles traversed during the applicable policy period in the use of such transportation property are traversed within the United States, such property will be considered ordinarily located in the United States if it is located in the United States more than 50 percent of the time during such period Moreover, if such transportation property is located in the United States for not more than 30 percent of the time during the applicable policy period, such property will be considered ordinarily located in the United States if more than 50 percent of the miles traversed during such period in the use of such property are traversed within the United States. If such transportation property is considered property in the United States because more than 50 percent of the miles traversed during the applicable policy period in the use of such property are traversed within the United States, the apportionment of premium provided in subdivision (i) of this subparagraph shall be made on a mileage basis. If, however, such property is considered property in the United States because such property is located in the United States more than 50 percent of the time during the applicable policy period, the apportionment of premium provided in subdivision (i) of this subparagraph shall be made on a time basis. - (v) **Noncommercial motor vehicles, ships, aircraft, and railroad rolling stock.** Except as provided in subdivision (iv) of this subparagraph, any motor vehicle, ship or boat, aircraft, or railroad rolling stock which at any time is actually located in the United States and which either (a) is registered with the United States, a State (including any political subdivision thereof), or any agency thereof or (b), if not so registered, is owned by a citizen, resident, or corporation of the United States will be considered property which is ordinarily located in the United States. Unless the premium which is attributable to the reinsuring or issuing of any insurance contract in connection with such property considered ordinarily located in the United States is specifically allocated under the contract to risks incurred when such property is actually located in the United States and to risks incurred when it is actually located outside the United States, such property will be considered property in the United States both when it is ordinarily located in, and when it is temporarily located outside, the United States; under no circumstances will such property be considered outside the United States on the basis of any apportionment of such premium. - (vi) **Property exported or imported by railroad or motor vehicle.** Any property which is exported from, or imported to, the United States by railroad or motor vehicle will be considered property ordinarily located in the United States which, when such property is not actually located in the United States, is temporarily located outside the United States. For example, if an insurance contract reinsured or issued in connection with property exported from the United States by motor vehicle covers risks commencing when such property is loaded on the motor vehicle at the United States warehouse and terminating when such property is unloaded at the foreign warehouse, and if the premium payable with respect to risks incurred when the property is in the United States and risks incurred when the property is in the foreign country is not separately stated, such property will be considered property in the United States only until such property is actually located outside the United States, provided that the premium can be properly apportioned (for example) on the basis of time or mileage, between risks incurred when the property is actually located in the United States and risks incurred when it is actually located outside the United States. If in such case the premium is not so apportionable, such property will be considered property in the United States both when such property is ordinarily located in, and when it is temporarily located outside, the United States. - (vii) **Property exported by ship or aircraft.** If an insurance contract which is reinsured or issued in connection with property which is exported from the United States by ship or aircraft covers risks all of which terminate when such property is placed aboard a ship or aircraft at the United States port of exit for shipment from the United States, such property will be considered property in the United States. If such insurance contract covers risks all of which commence when such property is placed aboard a ship or aircraft at the United States port of exit for shipment from the United States, such property will be considered property not in the United States. If such insurance contract covers risks commencing before, and terminating after, such property is placed aboard a ship or aircraft at the United States port of exit for shipment from the United States, such property will be considered property ordinarily located in the United States which, after such property is placed aboard such ship or aircraft at the United States port of exit, is temporarily located outside the United States. The application of this subdivision may be illustrated by the following example: - (viii) **Property imported by ship or aircraft.** If an insurance contract which is reinsured or issued in connection with property which is imported to the United States by ship or aircraft covers risks all of which terminate when such property is unloaded at the United States port of entry, such property will be considered property not in the United States. If such insurance contract covers risks all of which commence after such property is unloaded at the United States port of entry, such property will be considered property in the United States. If such insurance contract covers risks commencing before, and terminating after, such property is unloaded at the United States port of entry, such property will be considered property ordinarily located in the United States which, before such property is unloaded at the United States port of entry, is temporarily located outside the United States. For an illustration pertaining to the allocation or apportionment of the premium, see the example in subdivision (vii) of this subparagraph. - (ix) **Shipments originating and terminating in the United States.** Any property which is shipped from one place in the United States to another place in the United States, on or over a foreign country, the high seas, or the coastal waters of the United States will be considered property actually located at all times in the United States. For example, property which is shipped from New York City to Los Angeles via the Panama Canal or from San Francisco to Hawaii or Alaska will be considered property actually located at all times in the United States. - (x) **Shipments originating and terminating in a foreign country.** Any property which is shipped by any means, or a combination of means, of transportation from one foreign country to another foreign country, or from a contiguous foreign country to the same contiguous foreign country, on or over the United States will be considered property exclusively located outside the United States. Notwithstanding the foregoing, any property which is shipped by any means, or a combination of means, of transportation from one contiguous foreign country to another contiguous foreign country on or over the United States will be considered property ordinarily located in the United States which, when such property is not actually located in the United States, is temporarily located outside the United States. - (c) **Liability from United States activity.** The term “liability arising out of activity in the United States” means a loss, as described in [subparagraph (1)](#c-1) of this paragraph, or a liability, as described in [subparagraph (2)](#c-2) of this paragraph, which could arise from activity performed in the United States, as defined in [subparagraph (3)](#c-3) of this paragraph. - (1) **Loss described.** The term “loss” includes all loss of an insured which could arise from the occurrence of the event insured against except that such term does not include any loss in connection with property described in [paragraph (b)](#b) of this section. For example, such term includes, in the case of a promoter of outdoor sporting events, the loss which could arise from the cancellation of such an event because of inclement weather. - (2) **Liability described.** The term “liability” includes all liability of an insured in tort, contract, property, or otherwise. It includes, for example, the liability of a principal for the acts of his agent, of a husband for the acts of his spouse, and of a parent for the acts of his child. The term not only includes the direct liability which may be incurred, for example, by a tortfeasor to the person harmed, but also the indirect liability which may be incurred, for example, by a manufacturer to the purchaser at retail for a breach of warranty. - (3) **Activity in the United States—** - (i) **In general.** A loss or liability will be considered a loss or liability which could arise from activity performed in the United States if the loss or liability would result, if at all, from an activity exclusively carried on in the United States. Conversely, a loss or liability will be considered a loss or liability which could not arise from activity performed in the United States if the loss or liability would result, if at all, from an activity exclusively carried on outside the United States. In addition, a loss or liability will be considered a loss or liability which could arise from activity performed in the United States if the loss or liability would result, if at all, from an activity ordinarily carried on in, but partly carried on outside, the United States. If the premium which is attributable to the reinsuring or issuing of any insurance contract in connection with an activity ordinarily carried on in, but partly carried on outside, the United States can, on a reasonable basis, be allocated to, or apportioned between, the risks incurred with respect to the activity carried on in, and the risks incurred with respect to the activity carried on outside, the United States, such loss or liability will be considered a loss or liability which could not arise from activity performed in the United States to the extent the loss or liability would result, if at all, from that activity carried on outside the United States. However, a loss or liability will not be considered a loss or liability which could arise from an activity performed in the United States if such loss or liability would result, if at all, from an activity which is neither exclusively carried on in the United States nor ordinarily carried on in, but partly carried on outside, the United States. The principles of [paragraph (b)(2)(ii)](#b-2-ii) of this section for allocating or apportioning a premium on a reasonable basis to or between risks incurred when property is actually located in the United States and risks incurred when such property is actually located outside the United States shall apply for allocating or apportioning a premium on a reasonable basis to or between the risks incurred with respect to the activity carried on in, and the risks incurred with respect to the activity carried on outside, the United States. The rules prescribed in subdivisions (ii) through (vi) of this subparagraph shall apply in determining whether an activity is, or will be considered, exclusively carried on in or outside the United States and whether an activity is, or will be considered, ordinarily carried on in the United States and in determining what is the activity which is performed by the insured from which a loss or liability results or could result; such rules also limit the rule of premium allocation and apportionment prescribed in this subdivision. The determinations required by this subparagraph shall be made with respect to the location of an activity of the insured performed during the policy period applicable to the taxable year of the insuring or reinsuring corporation, or, if more than one policy period exists with respect to such taxable year, such determinations shall be made separately with respect to the location of the activity during each such policy period. - (ii) **Substantial activity carried on in the United States.** The term “activity” is used in its broadest sense and includes the performance of an act unlawfully undertaken, the wrongful performance of an act lawfully undertaken, and the wrongful failure to perform an act lawfully required to be undertaken. With respect to a loss described in [subparagraph (1)](#c-1) of this paragraph, the term “activity” includes the occurrence of the event insured against. The determination of whether an activity ordinarily is carried on in, but is partly carried on outside, the United States will depend on all the facts and circumstances in each case. An activity ordinarily is carried on in the United States if a substantial amount of such activity is carried on in the United States. Factors which will be taken into account in determining whether a substantial amount of activity is carried on in the United States are those which are connected with the activity and include, but are not limited to, the location of the insured's assets, the place where personal services are performed, and the place where sales occur, but only if such assets, services, and sales are connected with the activity. In all cases an activity will be considered substantially carried on in the United States if more than 50 percent of the insured's total assets, personal services, and sales, if any, connected with such activity are located, performed, or occur in the United States. On the other hand, an activity will, under no circumstances, be considered substantially carried on in the United States if not more than 30 percent of the insured's total assets, personal services, and sales, if any, connected with such activity are located, performed, or occur in the United States. For this purpose, the mean of the value of the total assets at the beginning and end of the policy period shall be used, determined by taking assets into account at their actual value (not reduced by liabilities), which, in the absence of affirmative evidence to the contrary, shall be deemed to be (a) face value in the case of bills receivable, accounts receivable, notes receivable, and open accounts held by an insured using the cash receipts and disbursements method of accounting and (b) adjusted basis in the case of all other assets. Personal services shall be measured by the amount of compensation paid or accrued for such services, and sales shall be measured by the volume of gross sales. An activity is carried on partly outside the United States if it is carried on, whether substantially or in substantially, outside the United States. - (iii) **Manufacturing, producing, constructing, or assembling activity.** If a person who manufactures, produces, constructs, or assembles property is liable with regard to the consumption or use of such property, such liability will be considered to result from the activity performed of manufacturing, producing, constructing, or assembling such property. If such person manufactures, produces, constructs, or assembles more than one type of product, the liability with regard to the consumption or use of one of such products will be considered to result from the activity performed of manufacturing, producing, constructing, or assembling that particular product. For example, the liability of a building contractor, which constructs apartment buildings only in the United States, for the improper construction of, or the failure to construct, an apartment building, will be considered to result from an activity exclusively carried on in the United States and will be considered a liability which could arise from activity performed in the United States. In further illustration, the liability (which is covered by a single policy of insurance) of a domestic corporation, which assembles refrigerators exclusively in the United States and manufactures automobiles both in a foreign country and in the United States through substantial activity carried on in each of such countries, for the negligent manufacturing of a part for one of the automobiles by the foreign branch, will be considered to result from an activity ordinarily carried on in, but partly carried on outside, the United States and will be considered a liability which could arise from activity performed in the United States. - (iv) **Selling activity.** If a person is liable with regard to selling activity performed, such liability will be considered, except as provided in subdivisions (iii), (v), and (vi) of this subparagraph, to result from such selling activity. A person will be considered to be engaged in selling activity if such person engages in an activity resulting in the sale of property. Thus, it is immaterial that, under the Code, such activity would not constitute engaging in or carrying on a trade or business in the country in which such activity is carried on, the property in the goods does not pass in such country, or delivery of the property is not made in such country. For example, if a foreign wholesale distributor, which manages its entire business operations in a foreign country and sells its inventory exclusively in the United States—its only contact in the United States being the promotion of such sales to United States retail outlets by advertising in trade publications and distributing sales catalogues—is liable for a breach of warranty with regard to the sale of property to a United States retail outlet, such liability will be considered to result from an activity exclusively carried on in the United States and will be considered a liability which could arise from activity performed in the United States. - (v) **Liability from service or driving activity—(a) In general.** If a person is liable with regard to any service activity performed, or is liable with regard to driving activity performed in connection with a motor vehicle, ship or boat, aircraft, or railroad rolling stock, whether or not exclusively used in the commercial transportation of persons or property, such liability will be considered to result from such service or driving activity. For example, if an oil company which drills for oil exclusively in a foreign country is liable with regard to the negligent handling by its employees of explosives in the course of such drilling there, such liability will be considered to result from an activity exclusively carried on outside the United States and will be considered a liability which could not arise from activity performed in the United States. In further illustration, if a corporation which services machinery exclusively in a foreign country under servicing contracts is liable with regard to the negligent repairing of a machine under such a contract, such liability will be considered to result from an activity exclusively carried on outside the United States and will be considered a liability which could not arise from activity performed in the United States. (b) Location of activities in connection with transportation property. For purposes of (a) of this subdivision, service or driving activity performed in connection with a motor vehicle, ship or boat, aircraft, or railroad rolling stock, whether or not exclusively used in the commercial transportation of persons or property, will be considered activity performed in the United States if the activity is carried on at a time when such property is or will be considered, in accordance with subdivision (iv) or (v) of [paragraph (b)(2)](#b-2) of this section, actually in the United States or ordinarily located in the United States. However, if the premium which is attributable to the reinsuring or issuing of any insurance contract in connection with such service or driving activity which is carried on at a time when such property is, or will be considered, ordinarily located in the United States can be allocated to, or apportioned between, the risks incurred when such property is actually located in the United States and risks incurred when it is actually located outside the United States, such liability will be considered a liability which could arise from activity performed in the United States only when such property is actually located in the United States. Any allocation or apportionment of premium under the preceding sentence shall be made in accordance with the rules of allocation and apportionment provided in subdivision (iv) or (v) of [paragraph (b)(2)](#b-2) of this section. For example, if a person is liable with regard to the performance of services outside the United States in the operation of a motor vehicle which is used exclusively in the commercial transportation of persons to and from the United States and which, because more than 50 percent of the miles traversed during the applicable policy period in the use of such property are traversed within the United States, is considered ordinarily located in the United States, such liability will be considered to be a liability which could not arise from activity performed in the United States only to the extent that the premium which is attributable to the reinsuring or issuing of any insurance contract in connection with such service activity is apportioned on a mileage basis between the risks incurred when such motor vehicle is actually located in the United States and when such vehicle is actually located outside the United States. See [paragraph (b)(2)(iv)](#b-2-iv) of this section. In further illustration, if a person is liable with regard to his negligent driving of a motor vehicle which is not used exclusively in the commercial transportation of persons or property, which is registered with any State, and which is driven both in the United States and a foreign country, such liability will be considered a liability which could arise from activity performed in the United States, unless the premium which is attributable to the reinsuring or issuing of an insurance contract in connection with such driving performed in such motor vehicle ordinarily located in the United States is specifically allocated under the contract to risks incurred with respect to driving performed in, and to risks incurred with respect to driving performed outside, the United States. See [paragraph (b)(2)(v)](#b-2-v) of this section. (c) Illustration. The application of this subdivision may be further illustrated by the following example: - (vi) **Liability from delivery of property.** If the person who is obligated to deliver property is liable with regard to such delivery, such liability will be considered to result from the activity performed of delivering such property. For example, if a corporation which exports all of its inventory from the United States to foreign countries or possessions of the United States is liable with regard to its failure to make delivery outside the United States of inventory it has sold, such liability will be considered to result from an activity exclusively carried on outside the United States and will be considered a liability which could not arise from activity performed in the United States. In further illustration, if a corporation which exports all of its inventory from a foreign country to the United States is liable with regard to its improper delivery in the United States of inventory it has sold, such liability will be considered to result from an activity exclusively carried on in the United States and will be considered a liability which could arise from activity performed in the United States. - (d) **Lives or health of United States residents.** Risks in connection with the lives or health of residents of the United States include those risks which are the subject of insurance contracts referred to in [section 801(a)](/cfr/26/801.md?p=a), relating to the definition of a life insurance company. If the insured is a resident of the United States at the time the insurance contract is approved, the risk is in connection with the life or health of a resident of the United States for the period of coverage under the contract. However, if during such period of coverage the insured notifies the insurer, or circumstances known to the insurer indicate, that the insured is no longer a resident of the United States, the risk shall cease to be a risk in connection with the life or health of a resident of the United States for the policy period in which the insured gives such notice or such circumstances are known to the insurer, and for each subsequent policy period. Conversely, if the insured is a resident of a particular foreign country at the time the insurance contract is approved, the risk is in connection with the life or health of a resident of such foreign country for the period of coverage under the contract. However, if during such period of coverage the insured notifies the insurer, or circumstances known to the insurer indicate, that the insured is no longer a resident of such foreign country, the risk shall cease to be a risk in connection with the life or health of a resident of such particular foreign country for the policy period in which the insured gives such notice or such circumstances are known to the insurer, and for each subsequent policy period. In determining the country of residence of an insured, the principles of §§ [301.7701(b)-1](/cfr/26/301.7701..1.md) through [301.7701(b)-9](/cfr/26/301.7701..9.md) of this chapter, relating to the determination of residence and nonresidence in the United States and of foreign residence, shall apply. Citizens of the United States are not residents of the United States merely because of their citizenship. The application of this paragraph may be illustrated by the following example: # §1.953-3. Risks deemed to be United States risks. - (a) **Artificial arrangements.** For purposes of [paragraph (a)](/cfr/26/1.953-1.md?p=a) of § 1.953-1, the term “United States risks” also includes under [section 953(a)(1)(B)](/cfr/26/953.md?p=a-1-B) risks which are deemed to be United States risks. They are risks (other than United States risks described in [section 953(a)(1)(A)](/cfr/26/953.md?p=a-1-A) and [§ 1.953-2](/cfr/26/1.953-2.md)) which a controlled foreign corporation reinsures under an insurance or annuity contract, or with respect to which a controlled foreign corporation issues any insurance or annuity contract, in accordance with any arrangement whereby another corporation which is not a controlled foreign corporation receives an amount of premiums (for reinsuring or issuing any insurance or annuity contract in connection with the United States risks described in [section 953(a)(1)(A)](/cfr/26/953.md?p=a-1-A) and [§ 1.953-2](/cfr/26/1.953-2.md)) which is substantially equal to the amount of premiums which the controlled foreign corporation receives under its contracts. Arrangements to which this rule applies include those entered into by the controlled foreign corporation, by its United States shareholders, or by a related person. - (b) **Evidence of arrangements.** The determination of the existence of an arrangement referred to in [paragraph (a)](#a) of this section shall depend on all the facts and circumstances in each case. In making this determination, it will be recognized that arrangements of this type generally are orally entered into outside the United States and that direct evidence of such an arrangement is not ordinarily available. Therefore, in determining the existence of such an arrangement, consideration will be given to whether or not there is substantial similarity between the type, location, profit margin expected, and loss experience of the risks which the corporation which is not a controlled foreign corporation insures or reinsures and the risks which the controlled foreign corporation insures or reinsures. Further, consideration will be given to the existence of prior similar arrangements between, and the identity of the directors or shareholders of, the corporation which is not a controlled foreign corporation, its shareholders, or related persons and the controlled foreign corporation, its shareholders, or related persons. However, the absence of such prior arrangements or identity of directors or shareholders will not of itself establish the nonexistence of an arrangement referred to in [paragraph (a)](#a) of this section. In determining whether the amounts received by the controlled foreign corporation and the corporation which is not a controlled foreign corporation are substantially equal, the period in which the controlled foreign corporation receives premiums need not be the same as, or identical in length with, that of the corporation which is not a controlled foreign corporation nor limited to a taxable year of the controlled foreign corporation. - (c) **Illustrations.** The application of this section may be illustrated by the following examples: # §1.953-4. Taxable income to which section 953 applies. - (a) **Taxable income defined—** - (1) **Life insurance taxable income.** For a controlled foreign corporation which is engaged in the business of reinsuring or issuing insurance or annuity contracts and which, if it were a domestic corporation engaged only in such business, would be taxable as a life insurance company to which part I ([sections 801 through 820](/cfr/26/801..820.md)) of subchapter L of the Code applies, the term “taxable income” means for purposes of [paragraph (a)](/cfr/26/1.953-1.md?p=a) of § 1.953-1 the gain from operations, as defined in [section 809(b)](/cfr/26/809.md?p=b) and as modified by this section, derived from, and attributable to, the insurance of United States risks. For purposes of determining such taxable income, the provisions of [section 802(b)](/cfr/26/802.md?p=b) (relating to the definition of life insurance company taxable income) shall not apply. Determinations for purposes of this subparagraph shall be made without regard to [section 501(a)](/cfr/26/501.md?p=a). - (2) **Mutual and other insurance taxable income.** For a controlled foreign corporation which is engaged in the business of reinsuring or issuing insurance or annuity contracts and which, if it were a domestic corporation engaged only in such business, would be taxable as a mutual insurance company to which part II ([sections 821 through 826](/cfr/26/821..826.md)) of subchapter L of the Code applies or a mutual marine insurance or other insurance company to which part III (sections [831](/cfr/26/831.md) and [832](/cfr/26/832.md)) of subchapter L of the Code applies, the term “taxable income” means for purposes of [paragraph (a)](/cfr/26/1.953-1.md?p=a) of § 1.953-1 taxable income, as defined in [section 832(a)](/cfr/26/832.md?p=a) and as modified by this section, derived from, and attributable to, the insurance of United States risks. Determinations for purposes of this subparagraph shall be made without regard to [section 501(a)](/cfr/26/501.md?p=a). - (3) **Corporations not qualifying as insurance companies.** For special rules applicable under this section in the case of a controlled foreign corporation which, if it were a domestic corporation, would not qualify as an insurance company, see [§ 1.953-5](/cfr/26/1.953-5.md). - (b) **Certain provisions inapplicable.** In determining taxable income under this section, the following provisions of subchapter L of the Code shall not apply: - (1) [Section 809(d)(4)](/cfr/26/809.md?p=d-4), relating to the operations loss deduction; - (2) [Section 809(d)(5)](/cfr/26/809.md?p=d-5), relating to certain nonparticipating contracts; - (3) [Section 809(d)(6)](/cfr/26/809.md?p=d-6), relating to certain accident and health insurance and group life insurance; - (4) [Section 809(d)(10)](/cfr/26/809.md?p=d-10), relating to small business deduction; - (5) [Section 817(b)](/cfr/26/817.md?p=b), relating to gain on property held on December 31, 1958, and certain substituted property acquired after 1958; and - (6) **Section 832(c)(5), relating to capital losses.** - (c) **Computation of reserves required by law—** - (1) **Law applicable in determining reserves.** The reserves which will be taken into account as reserves required by law under [section 801(b)(2)](/cfr/26/801.md?p=b-2), both in determining for any taxable year whether a controlled foreign corporation is a controlled foreign corporation described in paragraph [(a)(1)](#a-1) or [(2)](#a-2) of this section and in determining taxable income of such corporation for the taxable year under [paragraph (a)](#a) of this section, shall be the following reserves: - (i) **Reserves required by the law of a State.** The reserves which are required by the law of the State or States to which the insurance business of the controlled foreign corporation is subject, but only with respect to its United States business, if any, which is taxable under [section 819(a)](/cfr/26/819.md?p=a). - (ii) **Reserves deemed to be required.** To the extent of such controlled foreign corporation's insurance business not taxable under [section 819(a)](/cfr/26/819.md?p=a)— (a) Except as provided in (b) of this subdivision (ii), the reserves which would result if such reserves were determined by applying the minimum standards of the law of New York as if such controlled foreign corporation were an insurance company transacting all of its insurance business (other than its United States business which is taxable under [section 819(a)](/cfr/26/819.md?p=a)) for such taxable year in such State, and (b) With respect to all risks covered by insurance ceded to such controlled foreign corporation by an insurance company to which apply the provisions of subchapter L of the Code (determined without regard to [section 501(a)](/cfr/26/501.md?p=a)) and in respect of which an election is made by or on behalf of such controlled foreign corporation to determine its reserves in accordance with this subdivision (b), the amount of reserves against such risks which would result if all of such reserves were determined by applying the law of the State, to which the risks in the hands of such insurance company are subject, as if such controlled foreign corporation were an insurance company engaged in reinsuring such risks in such State. - (2) **Rules of application.** For purposes of [subparagraph (1)](#c-1) of this paragraph, the following rules shall apply: - (i) **Life insurance reserves computed on preliminary term basis.** For purposes of determining under [paragraph (a)](#a) of this section the taxable income of a controlled foreign corporation, an election may be made by or on behalf of such corporation that the amount of reserves which are taken into account as life insurance reserves with respect to contracts for which reserves are computed on a preliminary term basis shall be determined as provided in [section 818(c)](/cfr/26/818.md?p=c). This election shall apply, subject to [section 818(c)](/cfr/26/818.md?p=c), to all life insurance reserves of the controlled foreign corporation, whether or not reserves applicable to the United States business taxable under [section 819(a)](/cfr/26/819.md?p=a). However, reserves determined as provided in [section 818(c)](/cfr/26/818.md?p=c) shall not be taken into account in determining whether a controlled foreign corporation is a controlled foreign corporation described in paragraph [(a)(1)](#a-1) or [(2)](#a-2) of this section. - (ii) **Actual reserves required.** (a) A controlled foreign corporation will be considered to have a reserve only to the extent the reserve has been actually held during the taxable year for which such reserve is claimed. (b) For determining when reserves are required by the law of a State, see [paragraph (b)](/cfr/26/1.801-5.md?p=b) of § 1.801-5 of this chapter. - (iii) **Total reserves to be taken into account.** The total reserves of a controlled foreign corporation shall be taken into account in determining whether such corporation is a controlled foreign corporation described in paragraph [(a)(1)](#a-1) or [(2)](#a-2) of this section. Therefore, in making such determination, the reserves which, under [subparagraph (1)(i)](#c-1-i) of this paragraph, are required by the law of any State shall be taken into account together with the reserves which, under [subparagraph (1)(ii)](#c-1-ii) of this paragraph, are deemed to be required. Moreover, reserves applicable to the reinsuring or the issuing of insurance or annuity contracts of both United States risks and foreign risks shall be taken into account. Finally, except as provided in subdivision (i) of this subparagraph, the reserves which are taken into account in determining whether a controlled foreign corporation is a controlled foreign corporation described in paragraph [(a)(1)](#a-1) or [(2)](#a-2) of this section shall be the same reserves which are taken into account in determining under [paragraph (a)](#a) of this section the taxable income of such corporation. - (iv) **Method of comparing reserves when subject to more than one State.** If the insurance business of a controlled foreign corporation is subject to the law of more than one State, the amount of reserves taken into account under [subparagraph (1)(i)](#c-1-i) of this paragraph shall be the amount of the highest aggregate reserve required by any State, determined as provided in [paragraph (a)](/cfr/26/1.801-5.md?p=a) of § 1.801-5 of this chapter. - (d) **Domestic corporation tax attributes.** In determining taxable income of a controlled foreign corporation under this section there shall be allowed, except as provided in [section 953(b)](/cfr/26/953.md?p=b), this section, and [§ 1.953-5](/cfr/26/1.953-5.md), the exclusions and deductions from gross income which would be allowed if such corporation were a domestic insurance company engaged in the business of only reinsuring or issuing the insurance or annuity contracts which have been reinsured or issued by such corporation. For this purpose, the provisions of sections [819](/cfr/26/819.md), [821(e)](/cfr/26/821.md?p=e), [822(e)](/cfr/26/822.md?p=e), [831(b)](/cfr/26/831.md?p=b), and [832(d)](/cfr/26/832.md?p=d), relating to foreign insurance companies, shall not apply; however, for the exclusion from the taxable income determined under [section 953](/cfr/26/953.md) of amounts derived from sources within the United States, see [section 952(b)](/cfr/26/952.md?p=b) and [paragraph (b)](/cfr/26/1.952-1.md?p=b) of § 1.952-1. Furthermore, taxable income shall be determined under this section without regard to section [882 (b)](/cfr/26/882.md?p=b) and [(c)](/cfr/26/882.md?p=c), relating to gross income and deductions of a foreign corporation, and without regard to whether the controlled foreign corporation is carrying on an insurance business in the United States. For other rules relating to the determination of gross income and taxable income of a foreign corporation for purposes of [subpart F](/cfr/26/subpartF.md), see [§ 1.952-2](/cfr/26/1.952-2.md). - (e) **Limitation on certain amounts in respect of United States risks.** In determining taxable income under this section the following amounts shall not, in accordance with [section 953(b)(4)](/cfr/26/953.md?p=b-4), be taken into account except to the extent they are attributable to the reinsuring or issuing of any insurance or annuity contract in connection with United States risks described in [§ 1.953-2](/cfr/26/1.953-2.md) or [§ 1.953-3](/cfr/26/1.953-3.md): - (1) The amount of premiums determined under [section 809(c)(1)](/cfr/26/809.md?p=c-1); - (2) The net decrease in reserves determined under [section 809(c)(2)](/cfr/26/809.md?p=c-2); - (3) The net increase in reserves determined under [section 809(d)(2)](/cfr/26/809.md?p=d-2); and - (4) The premiums earned on insurance contracts during the taxable year, as determined under [section 832(b)(4)](/cfr/26/832.md?p=b-4). For the allocation and apportionment of such amounts to income from the insurance of United States risks, see paragraphs [(f)](#f) and [(g)](#g) of this section. - (f) **Items allocated or apportioned—** - (1) **Rules of allocation or apportionment.** In determining taxable income under this section, first determine all items of income, expenses, losses, and other deductions which directly relate to the premiums received for the reinsuring or the issuing of any insurance or annuity contract in connection with United States risks, as defined in §§ [1.953-2](/cfr/26/1.953-2.md) and [1.953-3](/cfr/26/1.953-3.md), and allocate such items to the insurance of United States risks. For example, the deductions allowed by [section 809(d)(1)](/cfr/26/809.md?p=d-1), relating to death benefits, [section 809(d)(3)](/cfr/26/809.md?p=d-3), relating to dividends to policyholders, and [section 809(d)(7)](/cfr/26/809.md?p=d-7), relating to the assumption by another person of liabilities under insurance contracts, shall be allocated to the insurance of United States risks to the extent they relate directly to the premiums received for reinsuring or issuing insurance or annuity contracts in connection with United States risks. Next, determine all items of income, expenses, losses, and other deductions which directly relate to the premiums received for the reinsuring or the issuing of any insurance or annuity contract in connection with foreign risks and allocate such items to the reinsuring of foreign risks. Finally, determine all items of income, expenses, losses, and other deductions which relate to the premiums received for the reinsuring or the issuing of any insurance or annuity contract in connection with both United States risks and foreign risks, and, except as provided in [paragraph (g)](#g) of this section, apportion such items between the insurance of United States risks and the insurance of foreign risks in the manner prescribed in subparagraph [(2)](#f-2) or [(3)](#f-3) of this paragraph, as the case may be. As used in this section, the term “foreign risks” means risks which are not United States risks as defined in [§ 1.953-2](/cfr/26/1.953-2.md) or [§ 1.953-3](/cfr/26/1.953-3.md). - (2) **Method of apportionment in determination of life insurance taxable income—** - (i) **Investment yield and net long-term capital gain.** Unless they can be allocated to the insurance of United States risks, as provided in [subparagraph (1)](#f-1) of this paragraph, in determining a controlled foreign corporation's taxable income for any taxable year under [paragraph (a)(1)](#a-1) of this section— (a) The investment yield under [section 804(c)](/cfr/26/804.md?p=c), (b) The amount (if any) under [section 809(b)(1)(B)](/cfr/26/809.md?p=b-1-B) by which the net long-term capital gain exceeds the net short-term capital loss, and (c) Those deductions allowed under section [809(d)(8)](/cfr/26/809.md?p=d-8), [(9)](/cfr/26/809.md?p=d-9), and [(12)](/cfr/26/809.md?p=d-12) which relate to gross investment income shall be apportioned to the reinsuring and issuing of insurance and annuity contracts in connection with United States risks in an amount which bears the same ratio to each of such amounts of investment yield, excess gain, and deductions as the sum of the mean of each of the items described in [section 810(c)](/cfr/26/810.md?p=c) at the beginning and end of the taxable year attributable to reinsuring and issuing any insurance and annuity contracts in connection with United States risks bears to the sum of the mean of each of the items described in [section 810(c)](/cfr/26/810.md?p=c) at the beginning and end of the taxable year attributable to reinsuring and issuing all insurance and annuity contracts. Thus, for example, if the ratio which the sum of the mean of each of the items described in [section 810(c)](/cfr/26/810.md?p=c) at the beginning and end of the taxable year attributable to reinsuring and issuing insurance and annuity contracts in connection with United States risks bears to the sum of the mean of each of the items described in [section 810(c)](/cfr/26/810.md?p=c) at the beginning and end of the taxable year attributable to reinsuring and issuing all insurance and annuity contracts in one to three, then, unless an allocation to the insurance of United States risks can be made as provided in [subparagraph (1)](#f-1) of this paragraph, one-third of each of such amounts of investment yield, excess gain, and deductions shall be apportioned to the reinsuring and issuing of insurance and annuity contracts in connection with United States risks, and two-thirds of each of such amounts shall be apportioned to the reinsuring and issuing of insurance and annuity contracts in connection with foreign risks. - (ii) **Other income and deductions—(a) Amount taken into account.** In determining a controlled foreign corporation's taxable income for any taxable year under [paragraph (a)(1)](#a-1) of this section, all items of income taken into account under [section 809(c)(3)](/cfr/26/809.md?p=c-3), relating to other amounts of gross income, and the other deductions allowed under [section 809(d)(12)](/cfr/26/809.md?p=d-12) to the extent that such other deductions do not relate to gross investment income shall be apportioned to the reinsuring and issuing of insurance and annuity contracts in connection with United States risks in an amount which bears the same ratio to each of such items of income or of such other deductions as the numerator determined under (b) of this subdivision bears to the denominator determined under (c) of this subdivision. (b) Numerator. The numerator used for purposes of the apportionment under (a) of this subdivision shall be an amount which equals the amount determined under (c) of this subdivision, but only to the extent that the amount so determined is taken into account under [paragraph (e)](#e) of this section in determining taxable income for the taxable year. (c) Denominator. The denominator used for purposes of the apportionment under (a) of this subdivision shall be an amount which equals— (1) The amount of premiums determined under [section 809(c)(1)](/cfr/26/809.md?p=c-1) for the taxable year, plus (2) The net decrease in reserves determined under [section 809(c)(2)](/cfr/26/809.md?p=c-2) for such year, minus (3) The net increase in reserves determined under [section 809(d)(2)](/cfr/26/809.md?p=d-2) for such year. - (iii) **Reserves used in apportionment formula.** The rules for determining which reserves are taken into account in determining the taxable income of a controlled foreign corporation under [paragraph (a)](#a) of this section shall also apply under subdivision (ii) (b) and (c) of this subparagraph in determining the net decrease in reserves under [section 809(c)(2)](/cfr/26/809.md?p=c-2) or the net increase in reserves under [section 809(d)(2)](/cfr/26/809.md?p=d-2). See [paragraph (c)](#c) of this section. - (3) **Method of apportionment in determination of mutual and other insurance income—** - (i) **In general.** In determining a controlled foreign corporation's taxable income for any taxable year under [paragraph (a)(2)](#a-2) of this section, any item which is required to be apportioned under [subparagraph (1)](#f-1) of this paragraph shall be apportioned to the reinsuring and issuing of insurance and annuity contracts in connection with United States risks in an amount which bears the same ratio to the total amount of such item as the amount of premiums earned on insurance contracts during the taxable year which is required to be taken into account by such corporation under [paragraph (e)(4)](#e-4) of this section in determining such taxable income bears to the total amount of all its premiums earned (as determined under [section 832(b)(4)](/cfr/26/832.md?p=b-4)) on insurance contracts during the taxable year. - (ii) **Reserves used in apportionment formula.** The principles of [subparagraph (2)(iii)](#f-2-iii) of this paragraph shall apply in determining the reserves included in premiums earned on insurance contracts during the taxable year for purposes of subdivision (i) of this subparagraph. - (g) **Separate accounting.** The methods of apportionment prescribed in subparagraphs (2) and (3) of paragraph (f) of this section for determining taxable income under this section shall not apply if the district director determines that the controlled foreign corporation, in good faith and unaffected by considerations of tax liability, regularly employs in its books of account a detailed segregation of receipts, expenditures, assets, liabilities, and net worth which clearly reflects the income derived from the reinsuring or issuing of insurance or annuity contracts in connection with United States risks. The district director, in making such determination, shall give effect to any foreign law, satisfactory evidence of which is presented by the United States shareholder to the district, director, which requires a reasonable segregation of those items of income, expense, losses, and other deductions which relate to determining such taxable income. - (h) **Illustration.** The application of paragraphs [(e)](#e) and [(f)](#f) of this section may be illustrated by the following example: # §1.953-5. Corporations not qualifying as insurance companies. - (a) **In general.** A controlled foreign corporation is not excluded from the application of [paragraph (a)](/cfr/26/1.953-1.md?p=a) of § 1.953-1 because such corporation, if it were a domestic corporation, would not be taxable as an insurance company to which subchapter L of the Code applies. Thus, if a controlled foreign corporation reinsures or issues insurance or annuity contracts in connection with United States risks, as defined in [§ 1.953-2](/cfr/26/1.953-2.md) or [§ 1.953-3](/cfr/26/1.953-3.md), and satisfies the 5-percent minimum premium requirement prescribed in [paragraph (b)](/cfr/26/1.953-1.md?p=b) of § 1.953-1, such corporation may derive income from the insurance of United States risks even though the primary and predominant business activity of such corporation during the taxable year is not the issuing of insurance or annuity contracts or the reinsuring of risks underwritten by insurance companies. - (b) **Income from insurance of United States risks by noninsurance company.** For purposes of [paragraph (a)](/cfr/26/1.953-1.md?p=a) of § 1.953-1, the taxable income derived from the reinsuring or the issuing of any insurance or annuity contract in connection with United States risks by a controlled foreign corporation which, if it were a domestic corporation, would not be taxable as an insurance company to which subchapter L of the Code applies shall be determined under [§ 1.953-4](/cfr/26/1.953-4.md), subject to, and to the extent not inconsistent with, the special rules prescribed in paragraph [(c)](#c) or [(d)](#d) of this section, whichever applies. - (c) **Special rules in determining taxable income—** - (1) **In general.** The rules prescribed in this paragraph apply in order to exclude from the determination under [§ 1.953-4](/cfr/26/1.953-4.md) of the taxable income described in [paragraph (b)](#b) of this section those items of the controlled foreign corporation's gross income and deductions which are not attributable to the reinsuring and issuing of insurance and annuity contracts. - (2) **Life insurance taxable income—** - (i) **Amount of investment yield taken into account.** For purposes of determining the taxable income of a controlled foreign corporation which would not be taxable as an insurance company to which subchapter L of the Code applies if it were a domestic corporation but would be taxable as an insurance company to which part I of such subchapter applies if it were a domestic insurance company engaged in the business of only reinsuring or issuing the insurance or annuity contracts which have been reinsured or issued by such corporation, the investment yield under [section 804(c)](/cfr/26/804.md?p=c), the amount (if any) by which the net long-term capital gain exceeds the net short-term capital loss, and all items of income taken into account under [section 809(c)(3)](/cfr/26/809.md?p=c-3) shall be taken into account, subject to the provisions of paragraphs [(e)](/cfr/26/1.953-4.md?p=e) and [(f)](/cfr/26/1.953-4.md?p=f) of § 1.953-4, in an amount which bears the same ratio to each of such amounts of investment yield, excess gain, and income items, as the case may be, as the numerator determined under subdivision (ii) of this subparagraph bears to the denominator determined under subdivision (iii) of this subparagraph. - (ii) **Numerator.** The numerator used for purposes of the apportionment under subdivision (i) of this subparagraph shall be the sum of— (a) The mean of each of the items described in [section 810(c)](/cfr/26/810.md?p=c) at the beginning and end of the taxable year, determined in accordance with the rules prescribed in [paragraph (c)](/cfr/26/1.953-4.md?p=c) of § 1.953-4 for purposes of determining taxable income of a controlled foreign corporation under [paragraph (a)](/cfr/26/1.953-4.md?p=a) of § 1.953-4, (b) The mean of other liabilities at the beginning and end of the taxable year which are attributable to the reinsuring and issuing of insurance and annuity contracts, and (c) The mean of the earnings and profits accumulated by the controlled foreign corporation at the beginning and end of the taxable year (determined without diminution by reason of any distributions made during the taxable year) which are attributable to the reinsuring and issuing of insurance and annuity contracts. - (iii) **Denominator.** The denominator used for purposes of the apportionment under subdivision (i) of this subparagraph shall be the mean of the value of the total assets held by the controlled foreign corporation at the beginning and end of the taxable year, determined by taking assets into account at their actual value (not reduced by liabilities), which, in the absence of affirmative evidence to the contrary, shall be deemed to be (a) face value in the case of bills receivable, accounts receivable, notes receivable, and open accounts held by a controlled foreign corporation using the cash receipts and disbursements method of accounting and (b) adjusted basis in the case of all other assets. - (3) **Mutual and other insurance taxable income—** - (i) **Amount of insurance income taken into account.** For purposes of determining the taxable income of a controlled foreign corporation which, if it were a domestic corporation, would not be taxable as an insurance company to which subchapter L of the Code applies but which if it were a domestic insurance company engaged in the business of only reinsuring or issuing the insurance or annuity contracts which have been reinsured or issued by such corporation, would be taxable as a mutual insurance company to which part II of subchapter L of the Code applies, or would be taxable as a mutual marine insurance or other insurance company to which part III of subchapter L of the Code applies, the sum of the items of gross income referred to in [section 832(b)(1)](/cfr/26/832.md?p=b-1) (except the gross amount earned during the taxable year from underwriting income described in [section 832(b)(1)(A)](/cfr/26/832.md?p=b-1-A)) reduced by the deductions allowable under [section 832(c)](/cfr/26/832.md?p=c) which are related to such items of gross income shall be taken into account, subject to the provisions of paragraphs [(e)](/cfr/26/1.953-4.md?p=e) and [(f)](/cfr/26/1.953-4.md?p=f) of § 1.953-4, in an amount which bears the same proportion to the sum of such items of gross income reduced by such deductions as the numerator determined under subdivision (ii) of this subparagraph bears to the denominator determined under subdivision (iii) of this subparagraph. - (ii) **Numerator.** The numerator used for purposes of the apportionment under subdivision (i) of this subparagraph shall be the sum of— (a) The mean of the controlled foreign corporation's unearned premiums at the beginning and end of the taxable year, determined under [section 832(b)(4)(B)](/cfr/26/832.md?p=b-4-B) and in accordance with the rules prescribed in [paragraph (c)](/cfr/26/1.953-4.md?p=c) of § 1.953-4 for purposes of determining taxable income of a controlled foreign corporation under [paragraph (a)](/cfr/26/1.953-4.md?p=a) of § 1.953-4, (b) The mean of such corporation's unpaid losses at the beginning and end of the taxable year, determined under [section 832(b)(5)(B)](/cfr/26/832.md?p=b-5-B), (c) The mean of the items described in [section 810(c)(4)](/cfr/26/810.md?p=c-4) at the beginning and end of the taxable year, to the extent allowable to such corporation under [section 832(c)(11)](/cfr/26/832.md?p=c-11), (d) The mean of other liabilities at the beginning and end of the taxable year which are attributable to the reinsuring and issuing of insurance and annuity contracts, and (e) The mean of the earnings and profits accumulated by such corporation at the beginning and end of the taxable year (determined without diminution by reason of any distributions made during the taxable year) which are attributable to the reinsuring and issuing of insurance and annuity contracts. - (iii) **Denominator.** The denominator used for purposes of the apportionment under subdivision (i) of this subparagraph shall be the mean of the value of the total assets held by the controlled foreign corporation at the beginning and end of the taxable year, determined in the manner prescribed in [subparagraph (2)(iii)](#c-2-iii) of this paragraph. - (d) **Separate accounting.** The special rules prescribed in [paragraph (c)](#c) of this section shall not apply if the district director determines that the controlled foreign corporation, in good faith and unaffected by considerations of tax liability, regularly employs in its books of account a detailed segregation of receipts, expenditures, assets, liabilities, and net worth which clearly reflects the income derived from the reinsuring or issuing of insurance or annuity contracts. The district director, in making such determination, shall give effect to any foreign law, satisfactory evidence of which is presented by the United States shareholder to the district director, which requires a reasonable segregation of the insurance assets of the controlled foreign corporation. # §1.953-6. Relationship of sections 953 and 954. - (a) **Priority of application.** For purposes of determining the [subpart F](/cfr/26/subpartF.md) income of a controlled foreign corporation under [section 952](/cfr/26/952.md) for any taxable year, the provisions of [section 954](/cfr/26/954.md), relating to foreign base company income, shall be applied, after first applying [section 953](/cfr/26/953.md), only with respect to income which is not income derived from the insurance of United States risks under [section 953](/cfr/26/953.md). For example, the provisions of [section 954](/cfr/26/954.md) may be applied with respect to the income of a controlled foreign corporation which is not income derived from the insurance of United States risks under [section 953](/cfr/26/953.md) because such corporation does not satisfy the 5-percent minimum premium requirement prescribed in [paragraph (b)](/cfr/26/1.953-1.md?p=b) of § 1.953-1, even though such corporation has taxable income, as determined under [§ 1.953-4](/cfr/26/1.953-4.md), which is attributable to the reinsuring or the issuing of any insurance or annuity contracts in connection with United States risks. In addition, the provisions of [section 954](/cfr/26/954.md) may apply with respect to the income of a controlled foreign corporation to the extent such income is not allocated or apportioned under [§ 1.953-4](/cfr/26/1.953-4.md) to the insurance of United States risks. - (b) **Decrease in income not material.** It is not material that the income of a controlled foreign corporation is decreased as a result of the application of [paragraph (a)](#a) of this section. Thus, in applying [§ 1.953-4](/cfr/26/1.953-4.md) to the income of a controlled foreign corporation described in [paragraph (c)(2)](/cfr/26/1.953-5.md?p=c-2) of § 1.953-5 which would, but for [paragraph (a)](#a) of this section, be subject to the provisions of [section 954](/cfr/26/954.md), there shall be allowed, in determining the taxable income derived from the insurance of United States risks under [§ 1.953-4](/cfr/26/1.953-4.md), a deduction under [section 809(a)(1)](/cfr/26/809.md?p=a-1) for the share of each and every item of investment yield set aside for policyholders; it is not material that in determining foreign base company income such deduction would not be allowed under [section 954(b)(5)](/cfr/26/954.md?p=b-5). Further, income of a controlled foreign corporation which is required to be taken into account under [section 953](/cfr/26/953.md) in determining income derived from the insurance of United States risks and would, but for the provisions of [paragraph (a)](#a) of this section, constitute foreign base company income under [section 954](/cfr/26/954.md) shall not be taken into account under [section 954(b)(3)(B)](/cfr/26/954.md?p=b-3-B) in determining whether foreign base company income exceeds 70 percent of gross income for the taxable year. - (c) **Increase in income not material.** It is not material that the income of a controlled foreign corporation is increased as a result of the application of [paragraph (a)](#a) of this section. Thus, in applying [§ 1.953-4](/cfr/26/1.953-4.md) to income of a controlled foreign corporation which would, but for [paragraph (a)](#a) of this section, be subject to the provisions of [section 954](/cfr/26/954.md), it is not material that the dividends, interest, and gains from the sale or exchange of stock or securities derived from certain investments which would not be included in foreign personal holding company income under [section 954(c)(3)(B)](/cfr/26/954.md?p=c-3-B) are included under [section 953](/cfr/26/953.md) in income derived from the insurance of United States risks. Further, income of a controlled foreign corporation which is required to be taken into account under [section 953](/cfr/26/953.md) in determining income derived from the insurance of United States risks and would, but for [paragraph (a)](#a) of this section, constitute foreign base company income shall not be excluded under [section 954(b)(3)(A)](/cfr/26/954.md?p=b-3-A) for the taxable year.