Today, Treasury and the IRS issued section 1297(b)(2)(B) addressing when a foreign insurance company’s income is excluded from the definition of passive income under section 1297(b)(2)(B). Section 1297(b)(2)(B) provides that the term “passive income” does not include any income that is derived in the active conduct of an insurance business by a corporation that is predominantly engaged in an insurance business and that would be subject to tax under subchapter L as an insurance company if the corporation were a domestic corporation. The proposed regulations define “active conduct” by reference to the temporary regulations under section 367(a), which generally require a corporation’s officers and employees to carry out substantial managerial and operational activities. The proposed regulations define “insurance business” as including the investment activities that are required to support or are substantially related to insurance and annuity contracts issued or reinsured by the foreign corporation. According to the preamble, the proposed regulations are intended to address certain arrangements in which a hedge fund establishes a purported foreign reinsurance company to defer and reduce U.S. tax with respect to investment income.