Global Tax Alert | 29 April 2014

Notice 2014-31 extends US passive foreign investment company active banking exception for qualifying government bonds

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In Notice 2014-31 (issued 24 April 2014), the US Internal Revenue Service retroactively extended the guidance described in Notice 2012-45, which expired in 2013. The guidance now applies to tax years of foreign corporations beginning in 2014, 2015, and 2016. The 2014 Notice makes no other changes to the 2012 Notice.

Notice 2012-45 provided relief from possible PFIC classification for foreign corporations that held excessive amounts of government bonds as a result of the global financial crisis and the European debt crisis. The Notice expanded the active banking exception to include income earned on certain government bonds (e.g., interest) by a foreign corporation meeting particular conditions during a tax year beginning in 2011, 2012, or 2013. Under the Notice, that income did not constitute “passive income” for purposes of determining whether the foreign corporation constituted a PFIC under Section 1297.1 Specifically, Notice 2012-45 announced that, “solely for purposes of section 1297”, income from “Qualifying Government Bonds” held by an “Active Bank” qualified for the active banking exception.

With the continuing issues in the global banking industry, the possibility of slipping into PFIC status remains an issue for certain foreign banks. As such, the continued protection from PFIC status afforded by Notice 2014-31 is welcome news.


1. In general, a foreign corporation is a PFIC in a taxable year if either (i) at least 75 percent of its gross income for that year is “passive income” or (ii) at least 50 percent of the assets it holds during the year produce passive income or are held for the production of passive income. Section 1297(a). Passive income is defined as any income of the kind that would be foreign personal holding company income as defined under Section 954(c), subject to certain exceptions. Section 1297(b)(1). The exceptions 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” (the so-called “active banking exception”). Section 1297(b)(2)(A).

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Washington, DC
  • Peg O'Connor
    +1 202 327 6229
  • Allen Stenger
    +1 202 327 6289
  • Andreia Leite Veríssimo
    +1 202 327 6034

EYG no. CM4384