Section 4371 Excise Tax on Insurance and Reinsurance Contracts: D.C. Circuit Holds that Federal Excise Tax Does Not Apply to Wholly Foreign Retrocession Agreements

Sullivan & Cromwell LLP - June 3, 2015

On May 26, 2015, in Validus Reinsurance, Ltd. v. United States, the United States Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit,” or the “court”) held that the excise tax imposed on insurance and reinsurance contracts under Section 4371 of the Internal Revenue Code (the “Code”) does not apply to retrocession agreements (reinsurance policies that protect against potential liabilities arising under other reinsurance policies) between two foreign entities.  The D.C. Circuit’s opinion narrowed the previous holding of the District Court, which had held that the excise tax does not apply to any retrocession agreements.