Insurance Excise Tax: Rates, Exemptions, and Filing

The U.S. federal insurance excise tax is a levy on insurance premiums for policies that cover risks within the United States but are issued by foreign insurance companies. This tax is established under Internal Revenue Code Section 4371. Its function is to level the playing field between foreign and domestic insurers. Because U.S.-based insurance companies are subject to federal income taxes on their earnings, the excise tax ensures that foreign insurers face a comparable tax burden, promoting fair competition.

Determining Tax Liability

The obligation to pay the federal insurance excise tax rests with the U.S. person or company that remits the premium to the foreign insurer, not the foreign insurance company itself. This places the compliance burden on the domestic entity. If that party fails to pay, the IRS can seek payment from other parties involved in the transaction. The tax is calculated on the gross premium paid for the policy.

Casualty Insurance and Indemnity Bonds

Casualty insurance policies and indemnity bonds that are sourced from a foreign insurer are subject to a 4% tax on the gross premium paid. This category is broad and covers a wide range of risks, including property damage, liability, and other hazards located within the United States. For example, if a U.S. company obtains a policy from a foreign insurer to cover its domestic factory against fire and theft, the premiums paid for that policy would fall under this 4% tax rate. The same rate applies to fidelity and surety bonds procured from foreign entities.

Life Insurance, Sickness, and Accident Policies

A lower tax rate of 1% applies to premiums paid for life insurance, sickness, and accident policies issued by a foreign insurer. This rate applies when the policy is on the life or health of a U.S. citizen or resident. The tax is calculated on the total premium payment for these types of coverage.

Reinsurance

Reinsurance is a common practice where an insurance company transfers a portion of its risk to another insurer. When a U.S. insurer cedes a portion of its policies to a foreign reinsurance company, the premiums paid to that foreign reinsurer are also subject to the excise tax. The rate for reinsurance premiums is 1%.

Available Tax Exemptions

The most significant exemption from the federal insurance excise tax stems from international income tax treaties, which the United States has with numerous countries. For the exemption to apply, the foreign insurance company must be a qualified resident of the treaty country, meaning it meets specific requirements outlined in the treaty to be eligible for its benefits. The foreign insurer must also not be insuring the U.S. risk through a “permanent establishment,” a tax term for a fixed place of business, within the United States.

To claim a treaty-based exemption, the U.S. premium payer is responsible for verification and documentation to prove the insurer’s eligibility. This documentation is important for audit purposes. Another statutory exemption can apply to insurance policies related to the export of goods from the U.S.

Information and Forms for Filing

The primary document for reporting and paying the insurance excise tax is Form 720, the Quarterly Federal Excise Tax Return. Filers must gather a detailed record of all gross premium payments made to foreign insurers during the quarter, categorized by the applicable tax rate. To complete Form 720, you will need to identify the correct lines for the insurance excise tax, which are in Part I of the form under IRS No. 30. The form requires you to list the total premiums paid for each tax rate category: 4% for casualty and indemnity, and 1% for life, sickness, accident, and reinsurance.

If you are claiming a treaty exemption, you must have proper documentation on file. This often involves obtaining a signed statement from the foreign insurer, a closing agreement with the IRS, or a valid Form W-8BEN-E to certify eligibility. This paperwork is not filed with the return but must be retained and available upon request by the IRS.

The Filing and Payment Process

The return must be filed and the tax paid quarterly. The filing deadlines are April 30, July 31, October 31, and January 31. Meeting these deadlines is important to avoid penalties and interest.

The IRS requires that excise tax payments be deposited using the Electronic Federal Tax Payment System (EFTPS). An exception exists for smaller liabilities. If the total net tax for the quarter for all taxes reported in Part I of Form 720 is less than $2,500, the payment can be mailed with the return. When paying by mail, a check or money order made payable to the “United States Treasury” should be sent with Form 720 and a Form 720-V payment voucher. After filing, you should retain a copy of the return and proof of payment for your records.