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When a foreign company seeks domestic status.

In Notice 89-79, the Internal revenue Service generally set forth the procedure under which a foreign insurance company might elect to be treated as a domestic company under Section 953(d) of the Internal Revenue Code of 1986.

In response to comments concerning Notice 89-79, the IRS indicated that the notice states that a corporation need not enter into a closing agreement or post a letter of credit if the electing corporation owns "assets which are physically located in the United States with an adjusted basis equal to 10 percent of the corporation's gross income for the prior year." Furthermore, the IRS states that the I 0 percent test applies for any taxable year at the end of the preceding year and must be met for each year. It also states that forthcoming regulations will deal with how a corporation in its first year-for example, one with no preceding taxable year-can comply with this test. If a letter of credit is used to meet the requirement, the IRS indicates that a closing agreement may be negotiated which will lapse and permit the elimination of the letter of credit if the 10 percent asset test can be satisfied in a later year. IRS Issues Disclosure Regulations As noted previously, Section 6114 of the 1986 code, and certain temporary regulations promulgated under it, requires that tax return positions relying on the benefits provided under treaties between the United States and other countries must be disclosed on separate filings. Failure to do so would result in substantial penalties. In the case of insureds using foreign insurers and captives, treaty provisions eliminate the federal excise tax and require permanent establishment in the United States before a resident of a treaty country will be considered engaged in a trade or business within the United States for federal income tax purposes. Final regulations were recently issued. Regarding provisions that eliminate the federal excise tax, Treasury Regulation Section 301.6114-1(c) (7) has been added "to waive reporting with respect to the excise tax imposed by Section 4371 if reporting that would otherwise be required on a quarterly basis is made on an annual basis; or if a person, other than the taxpayer, who is liable under Section 4374 for such excise tax on the same premium properly reports the information required by Section 301.6114-1(d) (4); or if a closing agreement has been entered into with the Service by the foreign insurance company that is the beneficial recipient of the premium subject to the excise tax."

Regarding the provision that would require establishing a permanent residence in the United States, reporting is still required under the final disclosure regulations.

No Reinsurer Shift Since enactment of the 1986 tax legislation, which imposed discounting on U.S. insurers and reinsurers, the Reinsurance Association of America has argued that the rate of excise tax imposed under Section 4371 of the code on reinsurance premiums ceded to foreign reinsurers should be increased to 4 percent. The increase would effectively eliminate a competitive disadvantage to U.S. reinsurers, which has resulted in a massive exodus of reinsurance premium from the United States. A new study conducted by Robert L. Carter for the Association of British Insurers indicates that this is not the case, and supports the view that the excise tax should not be increased.

Possible Penalties Generally, U.S. citizens with 5 percent or more of the value or voting power of a foreign corporation and, with respect to certain group captives, all U.S. owners regardless of their percentage ownership must file IRS Form 5471 each year.

For those participating in captives that are controlled foreign corporations, this form reflects the taxpayer percentage interest in the foreign entity, the names of U.S. directors and officers of the foreign company and the taxpayer's proportionate income share of the foreign corporation if the taxpayer is a U.S. shareholder-for example, an American owning at least 1 0 percent of the voting power or, in the case of certain group-owned captives, all U.S. owners regardless of the percentage of ownership.

Failure to submit a timely or complete form can result in a penalty of $1,000, and that penalty can be increased to a maximum of $25,000 for each form if the failure to file or deficiency in the form is not corrected after notice by the IRS. Individual notices will be sent indicating what is needed to complete forms which have been filed without the necessary information. Taxpayers are advised to respond promptly or establish reasonable cause for failing to do so.
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No portion of this article can be reproduced without the express written permission from the copyright holder.
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Title Annotation:insurance companies
Author:Wright, P. Bruce
Publication:Risk Management
Date:May 1, 1990
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