IRS May Change Treatment Of

Foreign Insurers Stock Earnings

By

The Internal Revenue Service has proposed a regulation that could cut foreign insurers U.S. income taxes.

The proposed regulation would let foreign insurers that do business in the United States treat much of the income that their stock holdings generate as trade-related income.

If a foreign insurer owned less than 10% of the stock of a U.S. company, it could treat earnings on that stock as trade-related income.

If a foreign insurer owned at least 10% of the stock of a U.S. company, it would have to continue to treat earnings on that stock as general “fixed or determinable, annual or periodical income.”

Today, foreign insurers with U.S. operations usually have to treat all income earned on U.S. stocks as FDAP income, according to a discussion of the proposed regulation that appeared in a recent issue of the Federal Register.

Tougher accounting rules and a higher tax rate often apply to FDAP income.

Mark Matthews, an IRS official, notes in the Federal Register that owning stock is part of an insurers business. “Insurance companies hold investment assets, such as stocks and bonds, to fund their obligations to policyholders and to meet their surplus (capital) requirements,” he writes.

That means stock held in a foreign insurers investment portfolio may be an asset held for use in the insurers trade or business, Matthews writes.

But, when a foreign insurer owns stock in a U.S. subsidiary, that stock is not an asset held to meet business needs, he continues.

“The 10% threshold is intended to distinguish portfolio stock held to fund policyholder obligations and surplus requirements from investments in a subsidiary,” Matthews writes.

Comments on the proposed regulation are due Sept. 23.


Reproduced from National Underwriter Edition, July 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.