December 20, 2013
Foreign Insurance Companies Taxed Under Code Sec. 953(d) Exempt from FATCA Withholding
The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 as an effort to help improve tax compliance involving foreign financial assets and offshore accounts. Final regulations were released early 2013 providing guidance to U.S. and foreign persons making, receiving, or withholding payments. Entities considered to be Foreign Financial Institutions (FFI) are required to file with the IRS no later than April 25, 2014, in order to avoid the 30% withholding requirement. If an FFI is not registered with the IRS, payors are required to begin withholding on withholdable payments made to the FFI after June 30, 2014. Other foreign entities may be considered to be a Non-Financial Foreign Entity (NFFE). A non-public NFFE is required to report to the payor the names of any US Person controlling at least 10% of the entity’s stock in order to avoid the withholding requirement.
The final regulations also clarified that insurance and reinsurance premiums are considered to be withholdable payments. In addition, foreign insurance companies taxed under code section 953(d) were required to be treated as a foreign entity unless licensed to do business in a U.S. state. Under the final regulations, an FFI includes an insurance company or a holding company that is a member of a group that includes an insurance company, and the insurance company or holding company is obligated to make payments related to cash value insurance or annuity contracts with values in excess of $50,000. An insurance company that does not issue cash surrender policies or annuities with values in excess of $50,000 will be considered to be an NFFE.
The Internal Revenue Service (IRS) recently released Notice 2013-69 which provides in more detail the due diligence procedures related to identification, documentation, withholding, and reporting requirements related to account holders and payees. Of particular importance though is a change in the definition of a U.S. person. Per the notice, the Treasury Department and the IRS intend to modify the definition of a U.S. person to include a foreign insurance company that has elected to be subject to U.S. income tax under code section 953(d). Due to this change, insurance and reinsurance premiums paid to a foreign insurance company taxed under code section 953(d) will no longer be considered withholdable payments subject to withholding and will no longer be subject to the FATCA rules. This is great news for U.S. companies making insurance or reinsurance premium payments to offshore insurance companies taxed as U.S. entities.
A full draft of IRS Notice 2013-69 can be found here.