Representative Richard Neal (D-Mass) and Senator Robert Menendez (D-NJ) introduced last week companion bills (H.R. 2054; S. 991) that would disallow an income deduction for reinsurance premiums paid by an U.S. insurer to an affiliated reinsurer if the reinsurer is not subject to U.S. federal income tax on the reinsurance premiums (the “Neal Bill”). If enacted, the Neal Bill would adversely affect many foreign captive insurance arrangements. Congress has considered similar prior proposals for a number of years, and the White House included such a proposal in its budget proposals this year. In addition, Representative Neal previously introduced a bill on this same issue in previous Congresses.
Under the Neal Bill, reinsurance premiums paid by U.S. insurers to reinsurers would not be deductible for U.S. federal income tax purposes if —
- such premiums are paid to an affiliated corporation,
- the reinsurance covers specified types of risks, and
- the reinsurance premium in the hands of the reinsurer is not subject to U.S. federal income tax.
Disallowance would not apply to premiums paid for reinsurance of life, annuity and certain accident and health risks. Thus, the Neal Bill would not apply to life and certain health reinsurance. For this purpose, a ceding company would be considered affiliated with a reinsurer if they are both part of the same controlled group of corporations, which very generally would include a parent corporation and subsidiary corporations in which it owns, directly or indirectly, 50 percent or more of the total combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of the corporation.
If a deduction is disallowed for a reinsurance premium, the ceding company would not be taxable on any associated ceding commission it receives or on any subsequent reinsurance recovered. Thus, the detriment to a ceding company from not being able to deduct reinsurance premiums is offset to an extent by the benefit of not having to include in income ceding commissions and reinsurance recovered.
Foreign reinsurers would have the option of electing to treat reinsurance premiums as subject to current U.S. federal income tax. If such an election is made, then the ceding company could deduct the reinsurance premiums it pays. In addition, under this election, the foreign insurance excise tax imposed by IRC 4371 would not apply to such reinsurance premiums.
In the accompanying press release (click here), the Neal Bill is described as closing an unintended loophole and that current law provides “foreign-owned insurers a significant advantage over their U.S. competitors in serving the domestic market.” The Bill is also described as generating revenue of $12 billion over 10 years.
To date, proposals like the Neal Bill have been very controversial and have not been able to garner broad Congressional support. It is uncertain what the prospects are for passage of the Neal Bill.