GlobalNote™ Spring 1998-page Two

     The recently enacted Taxpayer Relief Act of 1997 (the "Act") contains provisions which eliminate some overlap between the passive foreign investment company ("PFIC") rules and the controlled foreign corporation ("CFC") rules and allow shareholders of PFICs with "marketable stock" to mark their PFIC shares to market annually.
     In the case of a PFIC that is also a CFC, the Act generally treats the corporation as not a PFIC with respect to certain ten-percent shareholders. This provision applies if the corporation is a CFC and the shareholder is a U.S. shareholder subject to the current inclusion rules of Subpart F of the Code with respect to such corporation. However, the PFIC rules continue to apply in the case of a PFIC that is also a CFC to shareholders that are U.S. persons and that own (directly, indirectly or constructively) less than 10% of the corporation's stock and are therefore not subject to Subpart F.
     The Act contains a mark-to-market election for "marketable" PFIC stock. Under such an election, the shareholder includes in ordinary income each year an amount equal to the excess, if any, of the fair market value of the PFIC stock as of the close of the taxable year over its adjusted basis. PFIC mark-to-market losses are allowable as ordinary losses to the extent of net mark-to-market gains previously included in ordinary income with respect to such stock. PFIC stock is considered marketable if it is regularly traded on a national securities exchange that is registered with the SEC, on the national market system established pursuant to the Securities Exchange Act of 1934, as amended, or on any exchange or market that the Secretary of Treasury determines has rules sufficient to ensure that the market price represents a legitimate and sound fair market value. PFIC stock also is treated as marketable, to the extent provided in regulations, if the PFIC offers for sale (or has outstanding) stock which is redeemable at its net asset value in a manner comparable to a U.S. regulated investment company ("RIC"). In addition, all PFIC stock held by open-end RICs (and by closed-end RICs, except as provided by regulation) is treated as marketable stock. Once a taxpayer makes a mark-to-market election as to PFIC stock, the election applies to that stock for all subsequent years, unless the PFIC stock is no longer marketable or the IRS consents to a revocation of the election.
     The PFIC provisions are effective for taxable years of U.S. persons beginning after December 31, 1997, and taxable years of foreign corporations ending with or within such taxable years of U.S. persons.
     These rules are complex and factually sensitive. Accordingly, if you have any questions, please contact our tax department, which is up-to-date on these matters.

     There have been several important regulatory changes in the British Virgin Islands and in Bermuda affecting the way investment funds and investment mangers are regulated there.
     The BVI Mutual Funds Act, 1996, and certain amendments embodied in the Mutual Funds Act, 1997, came into force on January 2, 1998. The Act together with policy guidelines issued by the Registrar of Mutual Funds provide for regulation and authorization of mutual funds, as well as managers and administrators carrying on business in or from the BVI. In short, funds fall into several categories: public funds, private funds and professional funds. Most funds will either be private funds or professional funds and will need to apply for "recognition" no later than September 30th 1998. Other funds and administrators and managers need to act by March 30th.
     Bermuda has enacted new money laundering laws effective January 18th 1998. The emphasis is on knowing your investor and in that way having comfort that the invested amounts are not derived from criminal activities.
     In each case, we urge readers to contact their local professionals or to contact us for further guidance.