IRS outlines Bermuda tax refund procedures

Risk Management, May, 1989 by P. Bruce Wright

IRS Outlines Bermuda Tax Refund Procedures

Under the Bermuda Tax Treaty, federal excise taxes due for premiums paid to certain Bermuda insurance companies were subject to refund. This provision was retroactive to January 1, 1986, and effective until December 31, 1989. On March 20, 1989, the Internal Revenue Service issued Revenue Procedure 89-24, which details the requirements for applying for such a refund. The major points include:

Certification. To obtain a refund, the tax must have been paid to a Bermuda insurer or reinsurer certified by the Bermuda Registrar of Companies as a resident for the interim taxable period (i.e., calendar quarter) for which the refund is sought. The certification may be in the form of a master list prepared by the registrar or individual certifications. It is believed that, at present, the Bermuda Registrar of Companies has decided not to issue a master list, so individual certifications will be necessary.

Proportionate Reduction. A refund is not allowed for premiums paid to a Bermuda insurer if the risks covered by the premiums were reinsured by the Bermuda insurer with a person not entitled to the benefits of the Bermuda treaty or any similar treaty.

Limitation on Benefits. There are two parts to this requirement. First, no refund may be claimed unless at all times during the taxable period more than 50 percent of the number of shares of each class of stock were owned directly or indirectly by individual residents of the United States or Bermuda or by citizens of the United States. Bearer shares are considered not owned by such persons. Second, no refund may be claimed if the income of the insurer was used "in substantial part, directly or indirectly, to make distributions with respect to beneficial ownership interests and are substantially disproportionate to such interests, or to meet liabilities to persons who were neither residents of Bermuda nor citizens or residents of the United States."

The word "liabilities" refers to payments that reduce gross premiums or are deductible against gross income (for example, interest) and premiums paid to reinsure risks. Thus, a Bermuda insurer that quota share reinsurers 90 percent of its premium with a U.K. reinsurer will not be entitled to a refund of any excise tax. Section 3.04 of Revenue Procedure 89-24 contains a pro forma calculation to determine whether this requirement has been met.

Controlled Foreign Corporation Status. A refund may be claimed only if the Bermuda insurer or reinsurer was a CFC under the rules of Section 957 of the Internal Revenue Code of 1986, as amended, or under IRC 953(c).

Claimant. The claim for the refund may be made by the Bermuda insurer or reinsurer, or by the United States insured or broker who paid the tax. No claim will be paid unless an appropriate Penalties of Perjury Statement is filed. Sections 4.03 and 4.04 of the procedure give the forms for such statements.

Required Documentation. The refund claim must be filed on Form 843 and include certification which lists names and addresses of the insurer's or reinsurer's shareholders or policyholders of a mutual. In a case in which a closely held company is the shareholder or policyholder, the individuals who indirectly hold shares in the insurer through such shareholder or policyholder must be listed. When the principal class of shares of the shareholder or policyholder is publicly traded, this additional information does not have to be provided.

Required documentation also includes listing the percentage of outstanding shares of each class of stock owned by each shareholder. The calculation is given in Section 3.04 to determine if the income for the taxable period was used in substantial part to make distributions disproportionate to beneficial interests or to meet liabilities to persons who were not citizens or residents of the United States or residents of Bermuda.

Information to establish that the Bermuda insurer or reinsurer was a CFC for the taxable period and its income was treated as subpart F income is required documentation, as is information enabling the IRS to identify the accounts to which the excise taxes sought in the refund application were originally deposited. This includes names, addresses and taxpayer identification numbers of the persons who filed the excise tax returns, policy numbers, the amount of taxable premium by quarter, the amount of tax paid and refund requested for each quarter. The information also includes the name, address and taxpayer identification number of each insured, the policy number and term, the dates on which premiums were paid and the specific amounts. Finally, the amounts of excise tax paid and the dates the tax was paid to the IRS must be included.

On March 29, the IRS issued Notice 89-44, which indicates that the agency would allow protective claims for refunds under the treaty and will allow taxpayers six months from the date of the protective claim to perfect the claim by submitting the information required by Revenue Procedure 89-24.