Section 4371 Excise Tax on Reinsurance Contracts: IRS Rules that Federal Excise Tax Does Not Generally Apply to Wholly Foreign Reinsurance and Retrocession Agreements

Sullivan & Cromwell LLP - December 28, 2015

On December 23, 2015, the Internal Revenue Service (the “Service”) released Revenue Ruling 2016-03 (the “Ruling”), which provides that the Service will no longer apply the excise tax imposed on insurance and reinsurance agreements under Section 4371 of the Internal Revenue Code (the “Code”) to reinsurance and retrocession agreements between two foreign insurers or reinsurers, except in certain limited cases.  The Ruling revokes Revenue Ruling 2008-15 (the “Prior Ruling”), which described certain situations in which the excise tax would apply to foreign to foreign reinsurance and retrocession agreements.  The Service reconsidered the position taken in the Prior Ruling in light of the recent decision of the United States Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”) in Validus Reinsurance, Ltd. v. United States.