I.R.C. §953(d) – Election by Foreign Insurance Company to be treated as a Domestic Corporation

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Section 953(d) allows a controlled foreign corporation (CFC) engaged in the insurance business (an electing corporation) to affirmatively elect to be treated as a U.S. corporation for purposes of imposing United States tax. The election was first available for taxable years beginning after Dec. 31, 1987 and subjects the entity to tax in the U.S. on its worldwide income. An electing corporation agrees to compute its U.S. tax liability as if it were a domestic corporation subject to the rules contained in Subchapter L of the Internal Revenue Code (Subchapter L contains several parts which govern the U.S. taxation of insurance entities). In addition, the electing corporation must timely file its U.S. tax returns; may join in the filing of a consolidated U.S. corporation income tax return; and must timely pay any U.S. income tax liability that may be due (including the requirements to make estimated tax payments). As will be discussed below, in order to be granted §953(d) status, an electing corporation must make certain that it has made payments sufficient to cover its initial year tax liability no later than the due date (without extension) of the return (typically the March 15th following the close of the year for a calendar year taxpayer).

The primary driver of seeking status as a §953(d) entity arguably relates more to regulatory and accounting concerns than pure tax considerations. As discussed in detail below, a significant tax benefit of the election is the avoidance of the Federal Excise Tax on policies of insurance issued by foreign insurers.

The majority of this article will focus on the tax impacts of the election, but it is important to note that U.S. insurance companies are usually subject to rigorous regulatory restrictions on a wide variety of business and investment activities. For example, there are limitations on the types of investments insurance companies are allowed to make which can include concentration and issuer limitations. There can also be regulatory limitations on the volume of business that an insurance company may underwrite given its capital or “surplus” levels. To mitigate some of these restrictions, a business may form a general insurer or a captive insurance company in a foreign jurisdiction with more lenient investment and surplus requirements. In this way, the business has more flexibility and greater options on how best to deploy its capital.