What is Being Proposed

In an effort to reduce perceived U.S. tax advantages for certain multinational insurance and reinsurance groups with U.S. operations, the Obama administration in its 2016 Fiscal Year Budget Revenue Proposals seeks new legislation that would deny a U.S. cedent a federal income tax deduction for premiums paid to an affiliated non-U.S. reinsurer for the reinsurance of U.S. property and casualty risks. The disallowance of the deduction would apply where the non-U.S. reinsurer is not subject to U.S. federal income tax on the premium income. In addition, the proposal would exclude from a U.S. cedent’s income (in the same proportion that the premium deduction was denied) ceding commissions received, return premiums, reinsurance recovered, or other amounts received with respect to reinsurance policies for which a deduction is either wholly or partially denied.[1]

The proposal would be effective for policies issued in taxable years beginning after December 31, 2015, and is estimated to raise approximately $7.4 billion over 10 years.

How the Proposal Impacts Current Law

Current U.S. tax rules permit U.S. cedents a deduction for premiums paid for reinsurance to an affiliated reinsurer regardless of whether the affiliated reinsurer is a U.S. or non-U.S. company. The perceived U.S. tax advantage arises in the multinational group context when the insurance income of a non-U.S. reinsurer is not subject to current U.S. income tax. Reinsurance policies issued by non-U.S. reinsurers with respect to U.S. risks are subject to, and will continue to be subject to, a U.S. federal excise tax equal to one percent of the premiums paid, unless waived by an applicable tax treaty. Because of the disparate imposition of U.S. tax in this context, an incentive exists for U.S. cedents (currently enjoying a U.S. tax benefit in the form of a deduction for premiums paid for reinsurance) to reinsure their U.S. property and casualty risks with non-U.S. reinsurers not subject to U.S. federal income tax (as opposed to reinsuring with domestic affiliates or foreign affiliates whose income is currently subject to U.S. federal income tax).


While this proposal is similar to previous budget revenue proposals, including the Obama Administration’s 2015 proposals, currently there does not appear to be significant momentum in Congress to further the proposal’s enactment. Nonetheless, multinational insurance and reinsurance groups should be aware of the recent proposal and its potential impact on cross-border reinsurance transactions involving U.S. ceding companies.