Who Pays the Excise Tax on Foreign Life Insurance Premiums?

In this blog, you will learn about excise taxes on foreign life insurance premiums, covering several important topics:

• What is the Excise Tax on Foreign Life Insurance Premiums?
  This section explains the excise tax related to premiums paid for foreign life insurance policies, including its legal framework.

• How Much is the Excise Tax for Foreign Life Insurance Premiums?
  Here, we detail the specific tax rates applied to foreign life insurance premiums and any relevant conditions.

• Who Pays the Excise Tax on Foreign Life Insurance Premiums?
  This part clarifies who is responsible for paying the excise tax, including policyholders and insurance companies.

• Exemptions from the Excise Tax on Insurance Premiums
  We will discuss conditions for exemptions, particularly concerning income tax treaties and IRS agreements.

• How to Pay the Foreign Insurance Premium Excise Tax

According to IRS Section 4371, an excise tax is imposed on premiums paid by U.S. citizens (policyholders) to foreign insurers or reinsurers, as well as to any non-resident agents, solicitors, or brokers involved in foreign life insurance transactions. A foreign life insurance policy refers to a policy issued outside the United States.

If the income generated from a non-compliant policy is treated as ordinary income for the policyholder, that policy becomes subject to the excise tax. Notably, the excise tax applies even if the foreign life insurance product meets the criteria for life insurance under U.S. tax laws.

The excise tax on foreign life insurance premiums can be paid either by the foreign insurer or by the person paying the premium. Typically, the tax is imposed on the last domestic entity that remits payment to the taxable foreign insurer. This means that the policy owner, who may be a U.S. citizen or resident, is usually responsible for the tax.

In some rare cases, the foreign insurer may agree to pay the excise tax based on the terms of the life insurance policy. However, the general rule is that the liability falls on the party making the premium payment.

Certain exemptions apply to the excise tax on foreign life insurance premiums under specific conditions:

• Cash Value Accumulation Test or Guideline Premium Test: Policies that pass either of these tests may be exempt from excise tax. These tests ensure that the cash value of the policy is limited in relation to the death benefit, preventing excessive cash accumulation.

• Retirement Plan Policies: According to Section 6139 of the Technical and Miscellaneous Revenue Act of 1988, exemptions may be available for policies that cover retirement plans.

• Tax Treaty Exemptions: As stated in Rev. Proc. 2003-78, if the foreign insurer is a resident of a country that has a tax treaty with the U.S. allowing for an excise tax exemption, the premiums may qualify for exemption.

• Closing Agreements: If a closing agreement exists between the IRS and the foreign insurer for the relevant tax period, the taxpayer may be exempt from paying the excise tax.

• IRS Procedures: The foreign insurer or reinsurer must be covered by specific IRS procedures, such as Rev. Proc. 2003-78 or earlier provisions like Rev. Proc. 92-39, Rev. Proc. 87-13, or Rev. Proc. 84-82, to qualify for the exemption.

You have two options for paying the excise tax on foreign insurance premiums:

1. Manual method

• Download Form 720: Obtain the form from the IRS website and fill it out for the required category.

• Complete Section 30: In the form, fill out the section labelled “Foreign Insurance Taxes” for this excise tax.

• Mail the Form: Send the completed form along with a check for the tax amount to the appropriate IRS mailing address.

2. Online method

You can use an IRS-approved online portal, such as Simple720, to file your federal excise tax return quickly. Here’s how to do it:

1. Create an Account: Log in or create an account and provide your business details.

2. Select Form Type: Choose Form 720, then specify the tax year and quarter for your filing.

3. Access Foreign Insurance Tax Section: In the left panel under Form 720, navigate to the section for “Foreign Insurance Tax” and select “Policies Issued by Foreign Issuers.”

4. Enter Event Details: Select the type of event, tax date, and enter the premium amount. The system will automatically calculate your 1% excise tax and display it on the dashboard.

5. Review and Complete Payment: Check the summary and finalize your payment using options like Electronic Funds Withdrawal (Direct Debit) or the Electronic Federal Tax Payment System (EFTPS).

Once you complete your excise tax filing for foreign insurance policies, the process takes just a few minutes. After the IRS approves your submission, you will receive a stamped acknowledgment in the mail.

WRAP:

After reading this blog, you will have a comprehensive understanding of excise taxes on foreign insurance premiums. You will learn about what the excise tax is, the applicable tax rates, who is responsible for paying it, and the potential exemptions available. Additionally, you will know the steps to pay the excise tax.