Many US persons living abroad have foreign life, sickness or accident insurance or a foreign annuity. Yet, only a handful have any knowledge of the US Foreign Insurance Excise Tax provisions affecting these policies. Foreign asset information reporting may also apply. Here’s what you need to know!
Foreign Life Insurance
Generally, an excise tax of 1% is imposed on premiums paid for foreign life insurance, sickness or accident insurance or for a foreign annuity contract when the same is issued with respect to a US citizen or resident. See Internal Revenue Code Sections 4371 and 4372. Under Section 4372(e), the term ‘‘policy of life, sickness, or accident insurance, or annuity contract’’ means any policy or other instrument by whatever name called whereby a contract of insurance or an annuity contract is made, continued, or renewed with respect to the life or hazards to the person of a citizen or resident of the United States.
Foreign Casualty Insurance
Casualty insurance is subject to a 4% excise tax. With regard to casualty insurance the foreign policy must insure against, or with respect to, hazards, risks, losses, or liabilities within the United States. For example, a foreign entity’s insurance against destruction of a building located within the United States would meet this test for taxability. However, casualty insurance of a building physically located in Germany would not meet the location test for taxability. Obviously, the location of the risk plays a key role in determining whether a policy is subject to the foreign insurance excise tax. There is a distinct difference as to the location of risk requirement between domestic and foreign insureds. However, determining where the location of the risk is (i.e. within or outside of the United States) is sometimes less clear. Various rulings and cases provide guidance on some of these issues, but are beyond the scope of this blog posting.
The relevant form for payment of these excise taxes is Form 720. See Part 1, IRS # 30 (on p 2)
Sadly this is a difficult part of the Internal Revenue Code. Section 4371 requires policy holders to file the excise tax form every quarter to report and pay the 1% excise tax.
Form 720 was meant for businesses to fill out for miscellaneous taxes such as transportation of persons by air, kerosene use, aviation gasoline, and other items. However, the IRS stuck in “foreign insurance taxes” near the top of the 2nd page of the Form. Since the Form was designed for businesses to fill out, I understand it cannot be filed using an individual’s social security number. As such it seems policy holders must apply online for an EIN, solely for the purpose of filling out the form and paying the excise tax! Can it get any crazier than that?
Tax Treaty May Eliminate or Reduce the Excise Tax
In some cases, the excise tax may be reduced or eliminated by treaty. See the table below.
When a tax treaty is used to justify non-payment of a tax or the non-filing of a return, the taxpayer is required to file Form 8833 – Treaty Based Returns Position Disclosure. Many tax treaties with a qualified exemption contain an anti-conduit’ provision which can eliminate the excise tax exemption if the foreign insurer reinsures the risks with another entity that itself would not be entitled to an excise tax exemption under a treaty with the United States. In other words, if an insurer located in a qualified treaty country reinsures with a reinsurer located in a non-treaty country, the excise tax exemption is lost to the extent of the amount reinsured and the amount of premium payment which was reinsured is then subject to excise tax. This rule prohibits the qualified treaty country insurer from acting as a straw man or kind of “front” for non-exempt country insurers.
Countries Having Treaty Exemptions with the United States are:
Information Reporting FBAR (FinCen Form 114) / Form 8938
Having foreign insurance policies or annuities means additional US tax burdens and potential penalties for improper tax filings. In addition to the excise tax rules, don’t forget that information reporting may be required with regard to such assets. Foreign life insurance or a foreign annuity with a cash surrender value is treated as a financial account and must be filed on a so-called FBAR; it must also be reported on Form 8938, assuming the threshold for filing these forms is met.
Learn more about FinCen Form 114 here.
Learn more about Form 8938 in my earlier blog post here.
See IRS FAQs for Form 8938 here.
And by the way, if you are expatriating, these excise taxes count in determining your tax compliance for the five years prior to the expatriation date. More on that topic in an upcoming blog post!
Posted April 4 2019
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