PLR 9946020: German insurer's US premiums exempt from insurance excise tax

Plain-English summary

A German property and casualty insurer asked whether premiums it received for United States insurance or reinsurance risks were exempt from the federal insurance excise tax. It represented that its German business met the asset, premium, and payroll ratios used to assess active business under the United States-Germany tax treaty. The IRS concluded that the insurer satisfied the treaty requirement and said persons otherwise required to remit the tax could treat premiums paid from the specified date as exempt, relying on the letter or approved closing agreement. The ruling did not decide whether the taxpayer was an insurance company or whether its premiums were deductible under § 162.

Ruling snapshot

• Question: Are premiums paid to the German insurer for US risks exempt from the foreign insurance excise tax?
• Outcome: Approved under the United States-Germany tax treaty and the accompanying closing agreement.
• Key authorities: IRC § 4371; United States-Germany Tax Convention, Article 28(l)(c); Treas. Reg. § 46.4371-1(a).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Index No.: 4371.00-00
Person to Contact:
Number: 199946020
Release Date: 11/19/1999

Telephone Number

Refer Reply to
CC:INTL:B01: - PLR-111458-99
Date:
August 23, 1999

Taxpayer =
Year 1 =
Date 1 =
Amount 1 =
Amount 2 =
Amount 3 =
Amount 4 =
Amount 5 =
Amount 6 =
Ratio A =
Ratio B =
Ratio C =
Ratio D =

Dear
;

This responds to your letter dated June 1, in which you requested a ruling that premiums received by taxpayer on policies of insurance or reinsurance of United States risks are exempt from the insurance excise tax imposed by section 4371 of the Internal Revenue Code of 1986.

The ruling contained in this letter is predicated upon facts and representations submitted by, or on behalf of, taxpayer and accompanied by a penalty of perjury statement executed by the appropriate party. This office has not verified any of the above material submitted in support of the request for rulings. Verification of the factual information, representations, and other data may be required as a part of the audit process.

Taxpayer, a resident of the Federal Republic of Germany, is a stock company that writes property and casualty insurance.

Taxpayer represents that it is engaged in an active trade or business in Germany and that the premium income from U.S. insureds is derived in connection with, or is incidental to, that trade or business. Therefore, taxpayer contends that it qualifies for

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benefits under Article 28(l)(c) of the Convention.

The IRS considers premiums received by a foreign insurer or reinsurer to be derived in connection with, or incidental to, the active conduct of a trade or business in Germany if the average of the following three ratios exceeds 25 percent and each ratio is equal to at least 20 percent1:

1. The ratio of the average value that the assets of the insurer or reinsurer used or held
   for use in the active conduct of a trade or business in Germany during the taxable year bears to the value of all its assets. For Year 1, you represent that taxpayer had gross assets in Germany valued at Amount 1 and total assets valued at Amount 2. Therefore, the ratio of German assets to all of taxpayer’s assets was Ratio A percent.

2. The ratio that gross premiums received by the insurer or reinsurer for policies on
   risks situated in Germany bear to total gross premiums received by the insurer or insurer. For Year 1, you represent that gross premiums received by taxpayer of risks in Germany were Amount 3 and that gross premiums received on all risks were Amount 4. Therefore, the ratio of gross premiums on risks in Germany to total gross premiums was Ration B percent.

3. The ratio that the insurer or reinsurer’s payroll and commission expense paid to
   employees and agents for services performed in Germany bears to the insurer or reinsurer’s worldwide payroll and commission expense. For Year 1, you represent that taxpayer’s payroll and commission expense for services performed in Germany was Amount 5 and that worldwide payroll and commission expense was Amount 6. Therefore, the ratio of payroll and commission expense for services performed in Germany to payroll and commission expense for worldwide services was Ration C percent.

   The average of the three ratios is Ratio D percent. Therefore, taxpayer satisfies
   the requirements of Article 28(l)(c) of the Convention.

   Pursuant to paragraph (8)(a) of the enclosed Agreement, taxpayer’s liability for
   Federal Excise Tax, as agreed upon, including liability resulting from reinsurance of U.S. risks with persons not entitled to exemption under the Convention or another convention, will commence on Date 1, the date of taxpayer’s ruling request. The letter of credit required by paragraph (5)(a) of the enclosed Agreement, in the amount of
   $75,000, must be in effect within 30, days of the date the Agreement is finally signed on the Commissioner’s behalf.

   Any person otherwise required to remit the Federal excise tax on foreign
   insurance or reinsurance policies issued by you pursuant to section 46.4371-1(a) of the

   1
   See Rev. Proc. 92-39, sec. 3.06, 1992-20 I.R.B. 24 (May 18, 1992).

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Excise Tax Regulations may rely upon a copy of this letter and/or a copy of the approved Closing Agreement as authority that they may consider premiums paid to you on and after

Date 1, as exempt under the United States-Germany Tax Convention from the Federal excise tax.

This is a ruling and is directed only to the taxpayer named above. Section 6110(j)(3) of the Internal Revenue Code provides that this ruling may not be used or cited as precedent by any other taxpayer. Furthermore, this ruling does not address the issues of whether taxpayer is an insurance company or whether premiums paid to taxpayer are deductible under section 162 of the Internal Revenue Code.

Sincerely yours,

________
W. EDWARD WILLIAMS
Senior Technical Reviewer
Branch 1
Associate Chief Counsel (International)

Enc: Copy of approved Closing Agreement
Copy for section 6110 purposes

cc: Assistant Commissioner (International) Attn: Chief , Examination Division
950 L’Enfant Plaza
Washington, D.C. 20024