Tax Guidance Issued on Life Insurance and Annuity Payments to Nonresident Aliens and Residents of Puerto Rico

By Aquilio, Mark | Review of Business, Spring 2005 | Go to article overview

Tax Guidance Issued on Life Insurance and Annuity Payments to Nonresident Aliens and Residents of Puerto Rico


Aquilio, Mark, Review of Business


Abstract

Revenue Ruling 2004-75 provides that income received by nonresident alien individuals under life insurance or annuity contracts issued by a foreign branch of a U.S. life insurance company is U.S.-source income subject to a 30% tax and withholding. Similar income of Puerto Rican residents from contracts issued by a Puerto Rican branch will be considered U.S.-source income subject to graduated U.S. tax rates. Revenue Ruling 2004-75 will be applied prospectively.

**********

Introduction

In today's business world, the overseas operations of many U.S. companies have become an ever-increasing component of the companies' sales revenues. This is true of many U.S. life insurance companies selling life insurance and annuity contracts to nonresident alien individuals in foreign markets and to bona fide residents of Puerto Rico through a foreign or Puerto Rican branch (Contracts). Typically, due to business, legal and regulatory considerations, U.S. insurance companies will sell the Contracts through foreign branches.

U.S. taxation of the payments made on the Contracts has a direct impact on the ability of the company to market and sell the Contracts. If the payments are not subject to U.S. taxation, the insurance company may be able to charge more for the Contract than if the payments were subject to U.S. taxation. Conversely, the impact of the U.S. taxing the payments may place U.S. insurance companies at a serious competitive disadvantage with foreign insurance companies.

In Revenue Ruling (Rev. Rul.) 2004-75, the Treasury Department recently issued guidance, taking the position that income received by nonresident alien individuals from the Contracts is U.S.-source income that is subject to a flat 30% tax and withholding under Sections 871(a) and 1441 of the Internal Revenue Code of 1986, as amended (Code) [17, 19]. Also, Rev. Rul. 2004-75 provides that income received by bona fide residents of Puerto Rico pursuant to Contracts issued by a Puerto Rican branch of a U.S. life insurance company is U.S.-source income that is subject to the graduated U.S. income tax imposed by Code [section] 1 on U.S. citizens and residents (U.S. tax rates), rather than the 30% tax.

After many concerns were raised by taxpayers about the effect of Rev. Rul. 2004-75, the Treasury Department issued Rev. Rul. 2004-97 providing for the prospective application of Rev. Rul. 2004-75 [18]. Before analyzing Revenue Rulings 2004-75 and 2004-97, a general overview of the relevant statutory scheme of the Code governing Contract payments is necessary.

Statutory Overview: Subchapter N-tax Based on Income from Sources Within or Without the U.S.

U.S. citizens are taxed by the U.S. on their worldwide income at the U.S. tax rates. In general, resident aliens are taxed similar to U.S. citizens by the U.S. However, nonresident aliens are generally subject to U.S. tax on U.S.-source income which is not effectively connected with the conduct of a U.S. trade or business at a flat 30% tax rate under Code [section] 871 and on income which is effectively connected with the conduct of a U.S. trade or business at the U.S. tax rates [9]. In addition, a treaty may limit the U.S. tax imposed on the income of the nonresident alien and/or the amount of the income subject to U.S. tax [12]. Furthermore, special U.S. income tax provisions apply to bona fide residents of certain U.S. possessions, such as Puerto Rico.

Code [section] 861 addresses a central issue regarding the U.S. taxation of income of nonresident alien individuals, namely whether the income is from sources within the United States. While many of the U.S.-source rules are enumerated in the Code, areas not covered by the statute have been addressed in the underlying Regulations, in administrative rulings and by the judiciary. Neither Code [section] 861 nor the Regulations directly address the U.S. sourcing of payments made on Contracts. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Tax Guidance Issued on Life Insurance and Annuity Payments to Nonresident Aliens and Residents of Puerto Rico
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.