If my subsidiary is licensed as a surplus lines insurance broker but doesn't actually owe any insurance premiums tax, can it still be included in our combined Virginia corporate income tax return?

Plain-English summary

A corporation and its affiliates filed combined Virginia corporate income tax returns for 2015 and 2016. During an audit, the Department removed one subsidiary from the combined return because that subsidiary had filed a Virginia Insurance Premiums License Tax form (Form 802) as a surplus lines insurance broker -- the auditor treated it as an exempt "insurance company" not subject to corporate income tax, and assessed additional corporate tax against the remaining group. The parent corporation appealed, arguing the subsidiary either wasn't truly an insurance company, or, alternatively, that its income was purely from intercompany transactions.

The Department explained that Virginia's corporate income tax exemption for insurance companies is narrower than it might first appear: it exempts a company only "to the extent" it's actually subject to the separate license tax on insurance premiums, meaning an insurance company can still owe ordinary corporate income tax on activities separate from its insurance business. The subsidiary here had to file Form 802 because it was licensed by the State Corporation Commission as a surplus lines broker, but it reported no gross premium income and had no premiums tax liability. Being licensed as a broker and being subject to the premiums tax on actual insurance business are two different things -- surplus lines brokers are governed by an entirely different part of Virginia's insurance code and file different forms than insurance companies. Here, the subsidiary's actual business was providing financial, accounting, tax, regulatory, IT, and actuarial support services, none of which is subject to the premiums tax, and it had its own Virginia payroll and property, giving it real Virginia corporate tax nexus and positive apportionment factors. Since the subsidiary was affiliated with the parent, had positive Virginia apportionment factors, and used the same tax year, it met all the requirements to be included in the parent's combined Virginia return. The Department directed the audit staff to put the subsidiary back into the combined return and revise the assessment.

What this means for you

Corporate groups with a subsidiary licensed in some insurance-adjacent capacity (broker, agent, etc.)

Don't assume a subsidiary is automatically exempt from Virginia corporate income tax just because it holds an insurance-related license or files an insurance premiums tax form. The exemption only reaches income actually subject to the premiums license tax -- income from separate, non-insurance activities, like shared services provided to affiliates, remains subject to ordinary corporate income tax and combined-return treatment.

Groups filing combined Virginia corporate income tax returns with insurance-adjacent subsidiaries

Check whether each subsidiary is affiliated, has positive Virginia apportionment factors, and shares the group's tax year -- those are the actual eligibility requirements for combined filing, independent of whether a subsidiary also happens to hold an insurance license.

Common questions

Q: Does holding an insurance broker's license automatically make a company exempt from Virginia corporate income tax?
A: No -- the exemption for insurance companies under Va. Code § 58.1-401 applies only "to the extent" the company is actually subject to the separate insurance premiums license tax; a licensed broker with no premium income and non-insurance business activities remains subject to ordinary corporate income tax.

Q: What determines whether a subsidiary can be included in a combined Virginia corporate income tax return?
A: Under 23 VAC 10-120-323(B)(1), the subsidiary must be subject to Virginia income tax if filing separately, affiliated with the group under Va. Code § 58.1-302, and use the same taxable year as the rest of the group.

Q: What kind of income does the insurance company exemption not cover?
A: Income earned from a business separate from the company's actual insurance business, such as shared administrative, technology, or actuarial services provided to affiliates, remains subject to ordinary corporate income tax.

Citations and references

• Va. Code § 58.1-401 (corporate income tax exemption for insurance companies, limited "to the extent" subject to the premiums license tax)
• Va. Code § 58.1-2500 and § 58.1-2501(A) (insurance premiums license tax)
• Va. Code § 38.2-4805.2 and § 38.2-4809(A) (surplus lines broker licensing and premiums tax liability)
• 23 VAC 10-120-323(B)(1) (eligibility requirements for filing a combined Virginia corporate return)
• P.D. 84-32 (3/12/1984) and P.D. 08-191 (12/1/2008) (insurance companies remain taxable on income from a separate, non-insurance business)

Subject

Exemption: Insurance Company Premiums

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-161

Original ruling text

December 30, 2022

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek correction of the corporate income tax assessment issued to * (the “Taxpayer”) for the taxable year ended December 31, 2016.

FACTS

The Taxpayer and its affiliates filed 2015 and 2016 combined Virginia corporate income tax returns and consolidated federal income tax returns. The Department’s auditor removed * (Subsidiary A) from the combined returns because it filed a Virginia Insurance Premiums License Tax Surplus Lines Broker’s Annual Reconciliation Tax Report (Form 802) with the Department, resulting in an assessment of corporate income tax for the taxable year ended December 31, 2016. The Taxpayer appealed, contending that it was not an insurance company, or in the alternative, that its income came from intercompany sales.

DETERMINATION

For corporate income tax purposes, Virginia Code § 58.1-401 provides an exemption for “[i]nsurance companies to the extent such company is subject to the license tax on gross premiums under Chapter 25 (§ 58.1-2500 et seq.) of this title and reciprocal or interinsurance exchanges which pay a premium tax to the Commonwealth as provided by law.” The language “to the extent such company” serves to clarify that an insurance company would be subject to corporate taxation on income earned in a business separate from its insurance business. See Public Document (P.D.) 84-32 (3/12/1984) and P.D. 08-191 (12/01/2008).

Virginia Code § 58.1-2501 A imposes the tax on the gross premium income of “every insurance company . . . which issues policies or contracts, for any kind of insurance . . . and on every corporation which issues subscription contracts for any kind of plan . . . .” The authority to determine whether Subsidiary A was subject to the license tax on insurance premiums rests with the Bureau of Insurance (VBOI), a division of the Virginia State Corporation Commission (SCC).

Pursuant to Virginia Code § 58.1-2500, an insurance company is “any company engaged in the business of making contracts of insurance.” Reciprocal insurance and interinsurance are treated as the same and are defined as “insurance resulting from the mutual exchange of insurance contracts among persons in an unincorporated association under a common name through an attorney-in-fact having authority to obligate each person both as insured and insurer.” See Virginia Code § 38.2-1201.

The Taxpayer explains that it was required to file Form 802 as a result of it being licensed as a producer and surplus lines broker by the SCC, even though it reported no gross premium income and had no tax due. As such, the Taxpayer asserts that it was subject to Virginia corporate income tax and was properly included in the Taxpayer’s combined returns.

A surplus lines broker is “an individual or business entity licensed . . . to sell, solicit, or negotiate insurance on properties, risks, or exposures located or to be performed in the Commonwealth with eligible nonadmitted insurers.” See Virginia Code § 38.2-4805.2. Under Virginia Code § 38.2-4809 A, every licensed surplus lines broker or any person required to be licensed as a surplus lines broker is subject to the license tax on gross premiums under Chapter 25 (§ 58.1-2500 et seq.) on each policy of insurance procured by it during the preceding calendar year with an eligible nonadmitted insurer.

Although Subsidiary A could have been subject to license tax on gross premiums as a surplus lines broker pursuant to Virginia Code § 38.2-4809 A, it does not necessarily follow that Subsidiary A would be considered an insurance company for the purposes of the corporate income tax exemption under Virginia Code § 58.1-401. Surplus line brokers are separately defined in Title 38.2 of the Code of Virginia , which governs insurance generally, and they file different forms than insurance companies to report any premiums license tax liability. To the extent a corporation licensed as a surplus lines broker has income that is not subject to the premiums license tax, such income would be subject to corporate income tax.

In this case, Subsidiary A provided financial, accounting, tax, regulatory and compliance, information systems and technology, and actuarial claims and underwriting support systems not subject to the insurance premiums tax. In addition, Subsidiary A had Virginia payroll as well as property located in Virginia. As such, it appears that the Taxpayer was conducting activities that created nexus for Virginia corporate income tax purposes and that it had positive Virginia apportionment factors.

Pursuant to Title 23 of the Virginia Administrative Code (VAC) 10-120-323 B 1, members of an affiliated group are eligible to file a combined return if they are: (i) subject to Virginia income tax if a separate return were to be filed, (ii) affiliated as defined by Virginia Code § 58.1-302, and (iii) filing using the same taxable year. In this case, Subsidiary A was affiliated, had positive apportionment factors and the same year-end as the Taxpayer. Therefore, Subsidiary A was eligible to be included in the Taxpayer’s combined Virginia corporate income tax returns for the 2015 and 2016 taxable years. The case, therefore, will be returned to the audit staff to include Subsidiary A in the combined returns and adjust the assessment accordingly. After the audit is revised, an updated bill will be issued if a balance remains due.

The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3918.B

Related Documents

84-32

08-191