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The Impact of FATCA on U.S. and Non-U.S. Reinsurance Organizations

Global financial services industry



The final regulations for Foreign Account Tax Compliance Act (“FATCA”) provide important detail regarding the FATCA requirements that impact the U.S. and non-U.S. reinsurance industry. Enacted in 2010, FATCA requires foreign financial institutions (“FFIs”) to report the identities of their U.S. accountholders to the IRS. Failure to comply results in the imposition of a 30% withholding tax levied on any payment of U.S. source income to the non-compliant FFI. To avoid the tax, FFIs that are not deemed-compliant or otherwise exempted must enter into a formal FFI agreement with the IRS to share the identities of U.S. account and asset holders, or comply with the requirements of an intergovernmental agreement (“IGA”), if applicable. Unless exempted, other non-financial foreign entities (“NFFEs”) seeking to avoid the tax will be required to provide information regarding certain of their U.S. owners to withholding agents.

The final regulations released on January 17, 2013 along with IRS Notice 2013-43 released on July 12, 2013 provide exceptions and exclusions to the withholding requirements and address many of the concerns raised after the release of the proposed regulations in February 2012. The regulations also suggest a broader framework of international cooperation seeking to ease challenges of FATCA compliance on foreign entities.

Overall, the final regulations and IRS Notice 2013-43 have eased some of FATCA’s compliance deadlines; however, reinsurance industry participants that are impacted still may need to make changes to processes, systems, and business relationships to overcome implementation challenges.

Accordingly, the reinsurance industry should begin now to analyze FATCA’s implications.

Industry impact

U.S. reinsurance industry impact

FATCA impacts the U.S. reinsurance industry, specifically ceding companies in the United States, because the final regulations continue to treat reinsurance premiums paid to foreign reinsurers as U.S. source Fixed, Determinable, Annual, Periodic (“FDAP”) income, even in cases where such premiums are subject to the excise tax under Code section 4371. The IRS explains that although the policy behind the excise tax is similar to that behind withholding under Chapter 3 (Code section 1441), thus making Chapter 3 withholding unnecessary, the reason for FATCA withholding is demonstrably different. That is, it is an incentive encouraging foreign insurers to become participating FFIs, rather than a tax on the income of the issuer.

This treatment of reinsurance premiums as FDAP income will compel U.S. ceding companies to identify and document the FATCA status of foreign reinsurers to which reinsurance premiums payments are made and potentially withhold to the extent foreign reinsurers have failed to certify their FATCA status or to comply with FATCA.

Non-U.S. reinsurance industry impact

FATCA requires all non-U.S. reinsurance entities, including most reinsurance companies that have elected domestic status under Code section 953(d), to determine and certify their status as an FFI or NFFE and to provide appropriate documentation to U.S. entities from which they receive FATCA withholdable payments.

It is first worth noting that companies that make an election under Code section 953(d) must determine whether they may treat themselves as a U.S. person for FATCA purposes or classify themselves as either an FFI or NFFE. The final regulations generally disregard the election to be treated as a U.S person under 953(d) except where the 953(d) company is licensed to do business in a U.S state. Thus a 953(d) company will generally be an FFI or an NFFE depending on whether it issues cash value insurance or annuity contracts.

Accordingly, a non-U.S. reinsurance company that cannot treat itself as a U.S. person under 953(d) must determine if it is an FFI or NFFE. An FFI is defined, in part, as a specified insurance company, meaning an insurance company, or a holding company that is a member of an expanded affiliated group that includes an insurance company, that issues or is obligated to make payments with respect to cash value insurance or annuity contracts. The definition of FFI also includes depository institutions, custodial institutions, investment entities and certain holding companies or treasury centers.

FATCA defines a cash value insurance contract as an insurance contract that has an aggregate cash value (an amount payable upon death, surrender or termination or available as a loan) exceeding $50,000 at any time during the calendar year. The term cash value insurance contract specifically excludes indemnity reinsurance contracts between two insurance companies. The IRS has opined that this exemption would not cover reinsurance of annuity contracts. Therefore, a non-U.S. reinsurance company engaged solely in indemnity reinsurance with another insurance company that does not include annuities would generally be classified as an NFFE and not as an FFI.

Furthermore, the final regulations also exclude the following amounts from the definition of cash value, which are generally intended to scope out general insurance coverage and pure protection coverage such as most term life insurance, disability insurance, health insurance, and property and casualty insurance:

  • Payments solely by reason of the death of an individual insurance under a life insurance contract
  • Personal injury or sickness benefits or a benefits providing indemnification of an economic loss incurred upon the occurrence of an insured event;
  • Refunds to the policyholder of a previously paid premium under an insurance contract;
  • Certain policyholder dividends; and
  • Returns of advance premiums or premium deposits for insurance contracts in certain situations.

Based on the abovementioned considerations, most non-U.S. reinsurance companies will be NFFEs and will not be subject to the same rigorous compliance obligations as FFIs. However, only certain excepted NFFEs will be completely exempt from FATCA’s reporting and withholding requirements other than certifying their excepted status. These excepted NFFEs include, in part, entities that are regularly traded on an established securities market and members of their expanded affiliated group (EAG). Excepted NFFEs also include NFFEs that are engaged in an active business, meaning less than 50% of their gross income is passive income (including income derived from reserves) and less than 50% of its assets are assets that produce or are held to produce passive income. An NFFE that is not excepted—otherwise known or a passive NFFE—will be required to certify to withholding agents either that it has no substantial U.S. owners, meaning a U.S. person with greater than 10% direct or indirect interest, or provide the withholding agent with certain information on the substantial U.S. owner(s) (i.e. the name, address, and TIN of each substantial U.S. owner) or otherwise be subject to 30% withholding on withholdable payments.

Next steps

U.S. and non-U.S. reinsurance industry participants should begin (or continue) to analyze the potential impact FATCA will have on processes, systems, and business relationships.

Considerations for U.S. reinsurance industry:
  1. Does the U.S. entity make payments of reinsurance premium to foreign reinsurers?

    − If the entity makes payments of reinsurance premium to non-U.S. reinsurers then it must document the FATCA status of each non-U.S. reinsurer to which premiums are ceded by obtaining the appropriate new Form W-8. The entity should also obtain a Form W-9 from all U.S. payees to which withholdable payments are made. Revised Forms W-8 and W-9, which contemplate FATCA, have been released in draft format and are expected to be finalized within the next few months.

    − For new obligations on or after July 1, 2014, these non-U.S. reinsurers should be documented immediately. For preexisting obligations on or before June 30, 2014, the U.S. entity will have a transitional period to document the FATCA status of the non-U.S. reinsurer.
  2. Does the U.S. entity have the capability to withhold and report on reinsurance premium payments to non-U.S. companies that do not comply with FATCA?

    − Withholding on U.S. source FDAP income payments, including reinsurance premium payments, for new obligations will begin on July 1, 2014. However, withholding does not apply to certain contracts outstanding on July 1, 2014 (“grandfathered obligations”) unless there is a material modification to the terms of the contract.

    − Reporting to the IRS on substantial U.S. owner information and withholdable income payments to the non-U.S. payees will begin in 2015 with respect to the 2014 calendar year.
Considerations for non-U.S. reinsurance industry:
  1. Does the foreign entity deal in cash value insurance contracts or annuity contracts, or otherwise qualify as an FFI?

    − If the entity writes or maintains cash value or annuity contracts, or otherwise writes or maintains contracts that fall within the definition of financial account, it will typically be considered an FFI (unless all such contracts fall within the financial account exceptions).

    − If the entity only writes or maintains contracts exempted from the definition of financial account, including indemnity reinsurance contracts, and does not conduct other FFI activities, it will typically be considered an NFFE.

    − If the entity reinsures annuity contracts, further analysis should be conducted to determine whether the entity is an FFI.
  2. How should the foreign entity establish its FATCA status to withholding agents?

    − The entity should provide Form W-8 to a withholding agent to certify its FATCA status.

Important FATCA dates in 2013 and 2014 

August 19 FATCA registration portal will be accessible for registration
April 25 Last date an FFI can register with IRS to ensure inclusion in the June 2, 2014 IRS FFI list
June 02 IRS scheduled to publish first “GIIN” list
July 01 Grandfathered obligations cutoff
July 01 USWA & FFI to begin new account onboarding
July 01 Begin income withholding (excluding certain offshore payment of U.S. source income)
December 31 FFI & USWA to complete documenting/remediating preexisting accounts that are considered “prima facie FFIs”

**Other withholding/reporting requirements phase in from 2015 through 2018

To learn more

This document attempts to highlight certain important provisions of the final regulations which generally impact the reinsurance industry and does not represent a broad-based summary of all of the changes. If you are directly or indirectly affected by the compliance obligations of the final regulations, you will likely want to understand the implication of these rules, exceptions and frameworks on your business and products and take affirmative steps soon with respect to FATCA implementation. If you wish to discuss the final regulations or any FATCA related matters, please contact one of our FATCA contacts listed on the following pages.

Full article is available for download. For more information please contact a Deloitte FATCA Leader or click here.

As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.


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