Magazine article Risk Management

Tax Implications for Offshore Insurers and Reinsurers

Magazine article Risk Management

Tax Implications for Offshore Insurers and Reinsurers

Article excerpt

Whether a foreign insurer or reinsurer is engaged in a U.S. trade or business (ETB) for federal income tax purposes has been a advisors have attempted to address over the years for offshore insurer/reinsurer clients. In the case of offshore companies that are controlled foreign corporations (CFCs), the issue is important because additional taxes could be imposed under the branch profits tax provisions for companies engaged in U.S. trade or business. In the case of a company that is not a CFC, the question is even more important--whether any U.S. income tax could be imposed. Also, failure to file returns if a foreign company is ETB can result in taxation based on gross income.

In general, the issue of whether a foreign corporation is ETB is dependent in the first instance upon whether or not the foreign corporation is resident in a country that has a tax treaty with the United States.

For firms located in countries that do not have a tax treaty, the test is based on "all facts and circumstances," i.e., one looks at the facts and circumstances relating to the operations within the United States. Jurisdictions in which captives or companies in the alternative risk market have no treaty include the Cayman Islands and the Bahamas. For companies located in jurisdictions that have entered into treaties with the United States and meet the requirements to secure the benefits of such treaties (such as Barbados and Bermuda), the test is based on whether there is a "permanent establishment" (generally defined as an office or other fixed place of business from which business is conducted) located in the United States.

However, there is a dearth of legal authority relating to whether insurers or reinsurers are ETB and whether they are located in a treaty country or not. Thus, both tax advisors and the Internal Revenue Service in the past have drawn analogies to cases involving other industries,

The recent decision in The Taisei Fire and Marine Insurance Co., Ltd., et al. v. Commissioner, 104 T.C. No. 27 (May 2, 1995), is the first case that sheds some light on how certain permanent establishment provisions will be applied in the context of insurance or reinsurance. The case involved the United States-Japan Income Tax Treaty and held that a U.S. reinsurance underwriting agent that acted on behalf of four Japanese insurance companies did not cause the companies to have permanent establishments in the United States. …

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