What Is the Excise Tax on Foreign Insurance Premiums?

The United States federal government imposes an excise tax on premiums paid for insurance policies issued by foreign companies. This tax is intended to place foreign insurers, who may not be subject to U.S. income taxes, on a more level playing field with domestic insurance companies. When a U.S. individual or business purchases insurance from a non-U.S. insurer to cover risks within the United States, this tax may apply. If a policy covers risks both inside and outside the country, the tax is calculated only on the portion of the premium related to the U.S. risk. The tax is a distinct obligation from income tax and is levied on the transaction of purchasing the insurance itself.

Scope of the Foreign Insurance Excise Tax

The responsibility for paying the foreign insurance excise tax falls on the U.S. person or entity that makes the premium payment to the foreign insurer. This could be the policyholder directly or, in some cases, a U.S.-based broker or agent remitting the payment on behalf of the insured. The key is identifying the last domestic entity that handles the funds before they are transferred to the foreign, non-exempt insurance company.

The tax applies to several specific categories of insurance. One major category is casualty insurance and indemnity bonds, which cover risks of property damage or liability within the United States. This also includes fidelity and surety bonds that protect against losses from employee dishonesty or failure to perform a contractual obligation.

Another area is life insurance, sickness and accident policies, and annuity contracts issued by foreign insurers. A foreign life insurance policy is one issued outside of the United States. The excise tax can apply even if the policy itself meets the U.S. tax law definition of life insurance.

Finally, the tax extends to reinsurance, which is insurance for insurance companies. When a domestic insurance company transfers a portion of its risk to a foreign reinsurance company, the premiums paid for that reinsurance are subject to the excise tax. The tax applies to reinsurance covering any of the taxable direct insurance categories.

Tax Rates and Calculation

The tax rates for the foreign insurance excise tax are specified in the Internal Revenue Code and vary by the type of insurance policy. For casualty insurance and indemnity bonds, the rate is 4 percent of the gross premium paid.

For life insurance, sickness and accident policies, and annuity contracts, the tax rate is 1 percent of the gross premium paid.

Reinsurance policies are also taxed at a rate of 1 percent of the premium paid to the foreign reinsurer. This applies when a U.S. insurer cedes risk to a foreign reinsurance company.

The tax base for all categories is the gross premium paid. This tax can sometimes apply at multiple levels in a process that has been called a “cascading tax.” For instance, a direct insurance policy might be taxed, and if that risk is then reinsured with another foreign entity, that reinsurance premium could also be taxed. However, the Internal Revenue Service (IRS) has clarified its position, and certain foreign-to-foreign transactions are no longer subject to this cascading effect.

Exemptions Under U.S. Law and Tax Treaties

An exemption from the foreign insurance excise tax exists for premiums that are considered “effectively connected with the conduct of a trade or business in the United States” (ECI). If a foreign insurance company is engaged in a U.S. trade or business and the premiums it receives are considered ECI, those premiums are subject to U.S. income tax. In such cases, the excise tax does not apply, preventing a form of double taxation on the same income.

A more common path to exemption is through bilateral income tax treaties between the United States and other countries. The existence of a treaty alone is not sufficient to claim the exemption. The foreign insurer must be eligible for the benefits of that treaty, which involves requirements related to its residency and business operations in the treaty country.

To operationalize the treaty exemption, a foreign insurer must enter into a specific agreement with the IRS, known as a closing agreement. In this agreement, the foreign insurer agrees to be liable as a U.S. taxpayer for the excise tax if it is later determined that it did not qualify for treaty benefits on a particular transaction.

The IRS publishes a list of foreign insurance companies that have entered into these closing agreements. U.S. persons paying premiums to an insurer on this list can do so without withholding or paying the excise tax. This is because the responsibility shifts to the foreign insurer under the terms of the agreement.

Filing and Paying the Tax

Preparation for Filing

To comply with the filing requirements for the foreign insurance excise tax, the liable person must first gather specific information. The primary document for reporting is Form 720, the Quarterly Federal Excise Tax Return. The filer will need to calculate the total gross premiums paid during the quarter for each distinct insurance category: casualty and indemnity, life and related policies, and reinsurance. Using these totals, the filer must apply the correct tax rate to each category to determine the tax liability, which is then entered on Form 720.

Submission Process

Once Form 720 is completed, it must be filed quarterly. The deadline for filing is the last day of the month following the end of the calendar quarter. For example, the return for the first quarter (January through March) is due by April 30th.

The completed Form 720 can be submitted by mail to the address specified in the form’s instructions. Payment of the calculated tax is due at the same time the return is filed. Payments can be made by check or money order with the mailed return, or filers can use the IRS Electronic Federal Tax Payment System (EFTPS) to both file the return and make the payment electronically.