PLR 200348001: Irish reinsurer qualifies for treaty excise tax relief

Plain-English summary

An Irish insurer reinsured U.S. variable annuity risks and sought relief from the federal excise tax on insurance premiums under the United States-Ireland tax treaty. Based on the insurer's representations about its Irish insurance business and taxation, the IRS concluded that it met the treaty's active business test. The letter says payers could treat premiums paid from the stated date as exempt, subject to the closing agreement's terms, including liability for risks reinsured with persons lacking treaty exemption. The IRS did not decide whether the taxpayer was an insurance company or whether the premiums were deductible.

Ruling snapshot

• Question: Do premiums paid to the Irish reinsurer qualify for treaty relief from the section 4371 excise tax?
• Outcome: Approved under the stated treaty and closing agreement terms.
• Key authorities: IRC § 4371; U.S.-Ireland income tax treaty arts. 2, 7, 23; Rev. Proc. 92-39.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200348001
Release Date: 11/28/2003
Index Number: 4371.03-00

--------------------
Person To Contact:
------------------------------------------- ---------------------, ID No. 50-21143R
---------------------------------------------- Telephone Number:
---------------------------------
---------------------
Refer Reply To:
In Re: CC:INTL:BR1 – PLR-113293-03
--------------------------------------------------- Date:
-------------------
August 28, 2003
-----------------------
------------------
------------
------------------

TY: ---------------

DO: Director International

Taxpayer = ------------------------------------------------------------------------------------------------
------------------------------------------
Corp X = ----------------------------------------------- Country = ----------- A Corp Y = ------------------ Area B = --------- Corp Z = --------------------------------------------- State C = ------------

Dear --------------:

This responds to your letters dated February 19, 2003, and June 2, 2003, in which you requested a ruling that premiums received by the Taxpayer on policies of insurance or reinsurance of U.S. risks are exempt from the insurance excise tax imposed by § 4371 of the Internal Revenue Code of 1986, as amended (“Code”), pursuant to the United States-Ireland income tax convention (“Treaty”).

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. 2 PLR-113293-03

Taxpayer is authorized to transact life insurance operations pursuant to the laws of Ireland. Taxpayer is wholly owned by Corp X, a company organized in Country A. Corp X is wholly owned by Corp Y, a corporation organized and registered in Country A and Area B, whose stock is traded on the London and New York stock exchanges. Taxpayer represents that the shares of Corp Y are substantially and regularly traded on those exchanges within the meaning of Treas. Reg. Section 1.884-5(d)(4). Corp Y also owns 100 percent of the stock of Corp Z, a life insurance corporation organized in State C. Taxpayer is reinsuring risks borne by Corp Z on variable annuity contracts issued by Corp Z in exchange for a reinsurance premium.

Taxpayer further represents that (a) it is a resident of Ireland; (b) primarily all of its gross income will consist of insurance and reinsurance premiums and investment earnings attributable to such premiums; (c) the premium income it receives and expects to receive from U.S. insureds or reinsureds is and will be derived in connection with or is incidental to its trade or business activities in Ireland; (d) its receipt of premiums is and will be subject to the generally applicable tax imposed by Ireland on insurance corporations resident in Ireland; and (e) more than 50 percent of its gross income is and is expected to be used to meet liabilities of U.S. individuals and other persons engaged in business in the United States.

Section 4371 imposes an excise tax on premiums paid on insurance policies issued to U.S. persons and covering risks wholly or partly within the United States, and to foreign persons engaged in a U.S. trade or business and covering risks within the United States. See § 4372(d). Rev. Proc. 92-39, 1992-1 C.B. 860, establishes procedures for entering into a closing agreement to establish an exemption from the § 4371 excise tax when the exemption is claimed under a U.S. income tax treaty.

Article 7(1)(Business Profits) of the Treaty provides as follows:

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.

Article 2(1)(a)(Taxes Covered) includes the § 4371 excise tax within the scope of the Treaty, but contains the following limitation:

The Convention shall, however, apply to the Federal excise taxes imposed on insurance premiums paid to foreign insurers only to the extent that the risks covered by such premiums are not reinsured with a person not entitled to the benefits of this or any other convention which provides exemption from these taxes.
 3
PLR-113293-03

Paragraph 2 of the Protocol to the Treaty requires that an Irish insurance company be subject to the generally applicable Irish tax on such companies, as follows:

For the purposes of paragraph 1, it is understood that this Convention shall not apply to the Federal Excise Taxes imposed on insurance premiums paid to foreign insurers where such premiums are not subject to the generally applicable tax imposed on insurance corporations in the Contracting State in which such insurers are resident.

The limitation on benefits provision in Article 23 of the Treaty sets forth several alternative safe harbors for claiming benefits under the Treaty. Article 23(3)(a) provides that a person who is not a “qualified person” under paragraph (2) of Article 23 nevertheless may qualify for benefits under the Treaty with respect to an item of income derived from the other State, if:
i) such resident is engaged in the active conduct of a trade or business in the first-mentioned State (other than the business of making or managing investments, unless such business is carried out by a bank or insurance company acting in the ordinary course of its business), and
ii) the item of income is connected with or incidental to the trade or business in the first-mentioned State, provided that, where such item is connected with a trade or business in the first-mentioned State and such resident has an ownership interest in the activity in the other State that generated the income, the trade or business is substantial in relation to that activity.

Paragraph 9(b)(i)(B) of the Protocol to the Treaty states that
an insurance company will be considered to be engaged in the active conduct of a trade or business if its gross income consists primarily of insurance or reinsurance premiums and investment income attributable to such premiums.

Article 23(3)(b)(i) of the Treaty provides that an item of income is connected with a trade or business
 4
PLR-113293-03
if the activity in the other State that generated the item of income is a line of business that forms a part of or is complementary to the trade or business conducted in the first-mentioned State by the income recipient.

The Taxpayer represents that it is a resident of Ireland and is subject to the generally applicable Irish tax imposed on Irish insurance companies. The Taxpayer states that all of its income will consist of premiums and investment earnings attributable to such premiums as well as from investment of its business capital. The premium income it expects to receive from U.S. insureds is a “part of” its trade or business in Ireland, according to the Taxpayer. Based on these representations, we conclude that the Taxpayer satisfies the active trade or business test of Article 23(3) and is eligible for benefits under the Treaty.

According to paragraph (8)(a) of the Closing Agreement, the liability of the Taxpayer for federal excise tax, as agreed upon, including liability resulting from reinsurance of U.S. risks with persons not entitled to exemption under the Treaty or another convention, will commence on February 19, 2003. The letter of credit required by paragraph (5)(a) of the Closing Agreement, in the amount of $75,000, must be in effect within 30 days of the date the agreement is signed on behalf of the Commissioner.

Any person otherwise required to remit the federal excise tax on foreign insurance or reinsurance policies issued by the Taxpayer pursuant to § 46.4374-1(a) of the excise tax regulations may rely upon a copy of this letter or an executed copy of the Closing Agreement as authority that they may consider premiums paid to the Taxpayer on and after February 19, 2003, as exempt under the Treaty from the federal excise tax.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. This ruling does not address the issues of whether the Taxpayer is an insurance company or whether premiums paid to the Taxpayer are deductible under §162 of the Code.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent. 5 PLR-113293-03

In accordance with the power of attorney on file with this office, a copy of this letter is being sent to the Taxpayer.

Sincerely,

W. Edward Williams
Senior Technical Reviewer
Office of the Associate Chief Counsel
(International)

Enclosure (1)