New Post-Validus Revenue Ruling Applies to Foreign Reinsurance Transactions

By and on February 24, 2016

In mid-2015, the United States Court of Appeals for the District of Columbia Circuit affirmed (although on narrower grounds) the decision of the United States District Court for the District of Columbia in Validus Reinsurance, Ltd. v. United States.  In Validus, 786 F.3d 1039, the D.C. Circuit ruled that there was no statutory authority for the imposition of a so-called “cascading” federal excise tax (FET) to foreign retrocession transactions – a transaction involving a policy of reinsurance issued by a foreign reinsurer to another foreign reinsurer.

The D.C. Circuit relied on two principles in rejecting the application of a “cascading” FET to foreign retrocession transactions:  (1) the presumption against extraterritoriality and (2) FET should not be imposed more than once on the same transaction (that is, on the same premium amounts).  The D.C. Circuit declined, however, to specifically speak on the issue of foreign reinsurance transactions – a transaction involving a policy of reinsurance issued by a foreign reinsurer to another foreign insurer (rather than reinsurer) – despite the fact that both principles might equally apply to these transactions as well.

However, the recently released Revenue Ruling 2016-03 specifically notes that “the IRS will no longer apply the one-percent excise tax imposed by section 4371(3) to premiums paid on a policy of reinsurance issued by one foreign reinsurer to another foreign insurer or reinsurer ….”  (emphasis added).  Thus, under Revenue Ruling 2016-03, there is no distinction between foreign retrocession and foreign reinsurance transactions.  For those taxpayers with foreign reinsurance transactions, who have been stuck in limbo after the Validus decision, Revenue Ruling 2016-03 may provide relief from an IRS examiner’s inappropriate imposition of a “cascading” FET.

Kristen E. Hazel
Kristen E. Hazel has extensive experience representing clients in US and international aspects of federal tax matters, including international acquisitions and divestitures, international joint ventures, and capital plan design and implementation. Her work includes both inbound and outbound transactions. Kristen is the co-chair of the Firm's Captive Insurance Affinity Group. She regularly counsels clients with respect to the tax aspects of organizing, operating and defending captive insurance companies. Read Kristen Hazel's full bio.

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