Foreign Insurance Excise Tax

Under the terms of certain income tax treaties between the United States and some countries, policies issued by a foreign insurer or reinsurer that is a resident of any of such countries may be exempt from the insurance excise tax, provided that the insurer or reinsurer meets the Limitation on Benefits Article of the relevant treaty14 Rev. Proc. 2003-78, as modified by Rev. Proc. 2015-46, provides instructions for establishing an exemption from the Code Sec. 4371 excise tax under an applicable U.S. income tax treaty15 In general, there are two types of treaty exemption: a qualified exemption and an unqualified exemption.16 Only a few treaties have an unqualified exemption and those that do are not typically with countries that host significant international insurance or reinsurance markets.17 Under an unqualified exemption, a foreign insurer merely needs to establish residency in the treaty country18 The treaties do not contain anti-conduit provisions. Because the unqualified exemption is relatively uncommon, this article will focus on qualified exemptions. [...]the subsequent reinsurance arrangement must have "as its main purpose, or one or more of its main purposes, obtaining" benefits under the treaty. In practice, UKCo keeps only a small spread with respect to the royalties it receives; most of the profit goes to the subsidiary that developed the patent. Because UKCo entered into these transactions in the ordinary course of its business, and there is no indication that it established its patent licensing business in order to reduce its U.S. withholding tax, the arrangements among UKCo and the entities do not constitute a conduit arrangement. Because UKCo performs significant activities with respect to the financing transactions, the participation of UKCo is presumed not to have as one of its main purposes the avoidance of U.S. withholding tax.28 These examples highlight Treasury's view that the anti-conduit provision in the US-UK Income Tax Treaty is limited in scope.