What Is a 953(d) Election and How Do You Make One?

An election under Internal Revenue Code (IRC) Section 953(d) permits certain foreign insurance companies to be treated as domestic corporations for U.S. tax purposes. This decision changes how the company is taxed, shifting it from the foreign regime to the U.S. system. By making the election, the company agrees to be subject to U.S. income tax on its worldwide income, similar to any corporation formed within the United States.

Normally, premiums paid to a foreign insurer for U.S.-based risks are subject to a federal excise tax (FET). A company that successfully makes the election is not subject to this FET, which can enhance its competitive position in the U.S. market. The election is comprehensive and, once made, applies to the year of the election and all subsequent years unless it is terminated.

Eligibility for the 953(d) Election

A foreign corporation must satisfy several specific conditions to qualify for the election. The entity must first be a foreign corporation that would be taxable under Subchapter L of the Internal Revenue Code, which governs insurance companies, if it were a domestic entity. This means that more than half of its business must involve issuing insurance or annuity contracts or reinsuring risks underwritten by other insurance companies.

A requirement is that the foreign corporation must qualify as a Controlled Foreign Corporation (CFC). For the purposes of this election, the definition of a CFC is modified. Generally, a CFC is a foreign corporation where U.S. shareholders own more than 50% of the vote or value. Under the special rule for the election, this threshold is lowered, and a foreign corporation is considered a CFC if U.S. shareholders own 25% or more of the vote or value.

The corporation must also agree to waive all benefits it might otherwise be entitled to under any U.S. tax treaty as a condition of the election. This waiver ensures that the company cannot selectively benefit from both domestic treatment and treaty provisions.

Required Information and Documentation

To make the election, a company must compile a detailed set of documents and meet specific security requirements designed to ensure future tax payments are made. The core of the application is the election statement, a formal declaration that contains the company’s name, address, U.S. taxpayer identification number (TIN), and its country of incorporation. It must also include a declaration that the company meets all eligibility requirements and an agreement to produce its books and records in the U.S. upon request.

Attached to the election statement must be a complete list of the company’s U.S. shareholders. This list must be current, reflecting ownership as of a date no more than 90 days before the election statement is mailed. For each U.S. shareholder, the list must include:

• Name
• Address
• TIN
• Their specific ownership percentage in the corporation

A condition of the election is meeting the IRS security requirement. A company can satisfy this by meeting an “Office and Asset Test.” This test requires the company to maintain an office or fixed place of business in the United States and own assets physically located in the U.S. with a value equal to at least 10% of its gross income from the prior year. If the company does not meet this test directly, it must enter into a closing agreement with the IRS and provide a letter of credit as security. The letter of credit is generally set at 10% of the company’s prior-year gross income, with a minimum of $75,000 and a maximum of $10 million.

Making the Election

The process of making an election is a formal, multi-step procedure. The first step is to file the signed election statement and the attached U.S. shareholder list with the IRS. The election must be initiated by the due date, including extensions, of the tax return for the first year it is intended to be effective.

After the IRS receives the election statement, it will determine if a closing agreement and letter of credit are necessary. If the company is not using the Office and Asset Test to meet the security requirement, the IRS will provide a closing agreement form to be completed. The election is not considered final or valid until the IRS is satisfied with the security arrangement.

Once the IRS accepts the election, it will return a stamped copy of the election statement and closing agreement, if applicable, to the company. A copy of this approved election statement must be attached to the company’s U.S. income tax return, Form 1120-PC, for the first year the election is effective and for all subsequent years.

Tax Treatment and Compliance After Election

Once an election is effective, the foreign corporation is subject to U.S. corporate income tax on its worldwide income, just as if it were a domestic insurance company. This means the company must annually file Form 1120-PC, the U.S. Property and Casualty Insurance Company Income Tax Return, to report its income and calculate its tax liability. The company is also responsible for making estimated tax payments throughout the year as required.

The election has implications for the company’s U.S. shareholders. With the company now being taxed as a domestic corporation, its U.S. shareholders are generally no longer subject to the complex anti-deferral rules that apply to investments in CFCs. This can simplify tax reporting for these shareholders.

Distributions, or dividends, paid by the electing company to its U.S. shareholders receive different tax treatment as well. Because the company is treated as a domestic corporation for tax purposes, these distributions may be considered qualified dividends. This can result in them being taxed at lower capital gains rates for individual shareholders, rather than at higher ordinary income rates.

Ongoing compliance is a continuing responsibility. The company must continue to meet the security requirements established during the election process. If a letter of credit was provided, it must be maintained and adjusted as required. Failure to meet these ongoing requirements can jeopardize the election’s status.

Termination of the Election

An election is intended to be long-term and cannot be easily undone. A company cannot voluntarily revoke its election without first obtaining the consent of the IRS. The IRS grants such requests only in rare and compelling circumstances, making the initial decision to elect a commitment.

The election can be terminated in two primary ways. The IRS can revoke the election if the company fails to comply with its requirements, such as failing to file its tax return, pay its tax liability, or meet the security requirements.

An election also terminates automatically if the company ceases to meet the underlying eligibility criteria. For example, if the ownership structure changes and the company no longer qualifies as a CFC under the 25% ownership test, or if it no longer meets the definition of an insurance company, the election will end. This termination is effective for the taxable year in which the company becomes non-compliant.

The tax consequences of termination can be substantial. The termination is generally treated as a deemed liquidation of the U.S. corporation. In this scenario, the company is viewed as having distributed all of its assets to its shareholders, who are then considered to have contributed those assets to a new foreign corporation. This constructive transaction can trigger a significant tax liability for the company and its shareholders.