PLR 200404030: Irish reinsurer qualifies for treaty relief from insurance excise tax

Plain-English summary

An Irish reinsurance company sought relief from the federal excise tax on premiums for policies covering U.S. risks under the U.S.–Ireland income tax treaty. It represented that it was subject to Irish insurance company tax and made key underwriting and investment decisions in Ireland. The IRS concluded that the company met the treaty's active trade or business test and was eligible for treaty benefits. The letter and closing agreement allow payers to treat qualifying premiums paid on or after the specified date as exempt, while preserving liability described in the agreement for reinsurance with persons lacking treaty exemption. The IRS did not decide whether the taxpayer was an insurance company or whether its premiums were deductible.

Ruling snapshot

• Question: Does the Irish reinsurer qualify for treaty relief from U.S. insurance excise tax?
• Outcome: Approved on the treaty eligibility issue, subject to the closing agreement's terms.
• Key authorities: IRC § 4371; U.S.–Ireland Income Tax Convention arts. 2, 7, 23 and its Protocol; Rev. Proc. 92-39.

Full text (IRS public release)

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Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200404030
Release Date: 01/23/2004
Index Number: 9114.03-19

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Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:INTL:B01 – PLR-104718-03
In Re: Date:
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October 23, 2003
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TY: -------------------

Legend

Taxpayer = ----------------------
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Date A = -------------------------
Date B = --------------------------
X = -----------------------------------------------------
Y = ----------------------------------------

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

This responds to your letter dated December 31, 2002, and additional information submitted by you on April 15, 2003, May 22, 2003, and September 2, 2003, in which you requested a ruling and closing agreement that premiums received by 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 (ACode@), pursuant to the United States-Ireland Income Tax Convention (ATreaty@).

The ruling contained in this letter is based upon information and representations submitted by, or on behalf of, Taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the

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material submitted in support of the request for a ruling, it is subject to verification on examination.

Taxpayer is a foreign stock reinsurance company that was organized in Ireland on Date A. It is a wholly owned subsidiary of X, an Irish company. Y, a Bermuda corporation, owns 100% of the stock of X.

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.

Paragraph 2 of the Protocol Amending the 1997 Tax Convention with Ireland (AProtocol@) 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 Aqualified person@ under paragraph (2) of Article 23 nevertheless may qualify for benefits under the Treaty

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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 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:
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.

Taxpayer represents that it is a resident of Ireland and is subject to the generally applicable Irish tax imposed on Irish insurance companies. Taxpayer states that its gross income will consist primarily of insurance or reinsurance premiums and the investment earnings attributable to such premiums. The premium income it receives from U.S. insureds is generated by an activity that forms a Apart of@ its trade or business in Ireland, according to Taxpayer. Taxpayer does not expect to receive premiums from only one U.S. company. In 2002, Taxpayer received the majority of its premium income from policies written on risks located outside of Ireland and the United States. Further, Taxpayer represents that the following decisions are made by employees in its office in Ireland: decisions regarding whether to reinsure a risk, computations and decisions regarding the pricing of a reinsurance policy, the decision as to whether any risk reinsured by Taxpayer should be reinsured with another reinsurer, and decisions regarding the investment of premiums.

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Based on these representations, we conclude that 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 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 Date B. The letter of credit required by paragraph (5)(a) of the Closing Agreement, in the amount of $---------, 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 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 Taxpayer on and after Date B, 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 Taxpayer is an insurance company or whether premiums paid to 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.

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

Sincerely,

W. Edward Williams
Senior Technical Reviewer, Branch 1
Office of Associate Chief Counsel
(International)

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