On May 26, 2015, the United States Court of Appeals for the District of Columbia upheld a District Court decision and ruled that the Internal Revenue Service could not impose excise tax on certain wholly-foreign retrocessions of insurance under Section 4371 of the Internal Revenue Code.1 In reaching its decision, the Court of Appeals wrestled with the “correct” meaning of several terms in the statute in an attempt to glean whether Congress intended the statute to apply to certain wholly-foreign retrocession contracts. While initially hailed as an important victory for the taxpayer (and important precedent for other taxpayers), a close reading of the Court of Appeals decision reveals that its holding was more limited than the ruling of the District Court. While the decision gives both sides room to claim some margin of victory, it should be read taking into account its interaction with certain related income tax treaty provisions, and it potentially leaves unanswered questions regarding existing tax withholding provisions.

By way of background, Code Section 4371 generally imposes an excise tax on premiums paid to certain foreign insurers and reinsurers related to policies of insurance or reinsurance and indemnity bonds covering certain United States risks.2 Because this excise tax is by its terms payable by “any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for whose benefit the same are made, issued, or sold,” all parties in the chain of coverage should be concerned with the potential imposition of this tax. In addition, the Internal Revenue Service (IRS) has taken the position that this tax can apply multiple times through cascading layers of reinsurance with respect to the same ultimate risk, including where both parties to such reinsurance contracts are wholly outside the United States. Depending on the type of coverage, the rate for this tax can range from 1% to 4% of the premium paid.