FATCA Regs Responsive to Some, But Not All, Insurer Concerns · 2REG-121647-10. 3The authors of this article drafted the ABA comments along with two other attorneys. See ‘‘ABA

FATCA Regs Responsive to Some,But Not All, Insurer Concerns

by Jean M. Baxley, Susan Seabrook, and

Brenda Viehe-Naess

Reprinted from Tax Notes Int’l, April 1, 2013, p. 71

Volume 70, Number 1 April 1, 2013

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FATCA Regs Responsive to Some, but Not All, InsurerConcernsby Jean M. Baxley, Susan Seabrook, and Brenda Viehe-Naess

On January 17 Treasury and the IRS released finalregulations implementing the Foreign Account

Tax Compliance Act provisions enacted in 2010.1 Theproposed regulations2 included several provisions spe-cific to insurance companies, as well as general provi-sions, which were of concern to insurance companies,thus provoking comment from hundreds of interestedparties and stakeholders. Comments on the proposedregulations were submitted by insurance companies,industry associations, and the Insurance CompaniesCommittee of the American Bar Association Section ofTaxation.3

We applaud the IRS’s and Treasury’s willingness tomeet with interested parties to hear ideas about refin-ing the proposed regulations and making the FATCArules administrable. We had the opportunity to discussthe issues raised in the ABA comments with IRS andTreasury officials in various meetings and public fo-rums. The individuals we interacted with truly listenedto the issues and concerns we raised, and we acknowl-

edge their dedication and thoughtfulness — eventhough we didn’t agree on all issues.

The preamble to the final regulations outlines thenumerous insurance-specific comments and suggestionsreceived. It explains whether specific comments wereincorporated into the final regulations and, if not, therationale for rejecting a particular comment. All in all,the final regulations are exemplary in their responsive-ness to commentators, although, as expected, they arenot perfectly accommodating in that they do not adoptall of the changes suggested by insurance industry-specific commentators. Indeed, in one area, the entitystatus of section 953(d) companies, we believe the finalregulations flatly contradict the statute and overstep thebounds of permissible regulatory action.

This article provides an overview of the insurance-specific ABA comments, outlines the IRS’s and Treas-ury’s responses to those comments, and discusses se-lected aspects of the final regulations that are relevantto many insurance companies’ business and ongoingFATCA compliance activities.

Common-Sense Timing: Reporting Periods

Proposed Regulations

The proposed regulations required a participatingforeign financial institution (FFI) to report annually thename, address, account balance, and payments for each

1T.D. 9610.2REG-121647-10.3The authors of this article drafted the ABA comments along

with two other attorneys. See ‘‘ABA Section of Taxation Com-ments on Proposed Regulations Under the Foreign Account TaxCompliance Act Offset Provisions of the HIRE Act, P.L. 111-147 Relating to Insurance Issues’’ (June 15, 2012).

Jean M. Baxley is a director with KPMG LLP Washington National Tax, Susan Seabrook is of counsel withSkadden, Arps, Slate, Meagher & Flom LLP, and Brenda Viehe-Naess is a lawyer and principal withWashington Advocates Group.

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U.S. account holder.4 Insurance companies objectedthat the provision imposed substantial compliance coststhat were likely to yield little valuable data after theinitial report was filed, and that it would do little tofurther the statute’s goal of preventing tax avoidance.The proposed regulations linked reporting requirementsfor banks and investment entities to their regular pointsof contact with customers — monthly and annual re-porting of account values.

ABA CommentsThe ABA comments recommended that compliance

requirements for insurance companies follow the natu-ral points of contact between insurance companies andtheir policyholders, just as they do for banks. For insur-ance companies, contacts with customers occur almostexclusively at policy inception, upon a change of cir-cumstances, and at the payment of benefits, with-drawals, or termination amounts. The ABA commentsrequested that reporting for insurance companiesmatch those contact points. Adopting those points forreporting would ensure that the IRS could track pay-ments that may be taxable in the United States andwould still be consistent with reporting requirements inmany European companies, so that compliance costsfor modifying existing reporting programs would bereduced.

Insurers also requested that the requirement for re-validation of a policyholder’s status as a foreign ac-count every three years be suspended for insurance andannuity contracts. Historically, insurance companypolicyholders have a very low response rate to com-pany mailings. Nonetheless, failure to respond willplace an account holder in the ‘‘recalcitrant account’’category and trigger a requirement to close the accountor withhold on payments.

OutcomeThe final regulations made no changes to the timing

of reports by insurance companies. They also retainthe three-year rule for refreshing documentation,5 butthey permit several low-risk categories of documenta-tion to remain valid indefinitely, unless the withholdingagent has knowledge of a change in circumstances.The many exceptions are based on the type of payeesupplying the written statement or documentation,6and they are available for certificates regarding alltypes of financial accounts, including cash value insur-ance contracts (CVICs) and annuities. The exceptionsshould cover most account holders of a CVIC or annu-ity. For example, for a U.S. account, such as a life in-surance contract issued by a U.S. company, a withhold-ing certificate from a non-U.S. individual (Form W-8)is valid indefinitely if it is accompanied by documen-

tary evidence establishing foreign status, and the with-holding agent does not have a current U.S. residence,mailing address, or telephone number for the accountholder. For a non-U.S. obligation, a participating FFI isrequired to obtain either a withholding certificate ordocumentary evidence, which would be valid indefi-nitely as long as there are no current U.S. indicia.Similarly, indefinite validity will apply to a withholdingcertificate accompanied by documentary evidence thatis furnished by a retirement fund, an excepted nonfi-nancial foreign entity (NFFE), a publicly traded NFFE,an active NFFE not engaged in a financial business, ora nonprofit organization. A withholding statement orwritten statement will have indefinite validity if pro-vided by a participating FFI or registered deemed-compliant FFI that has furnished a government-issuedidentification number (GIIN), or the FFI has verifiedthe GIIN on the IRS list of FFIs. Also, a withholdingcertificate will qualify for indefinite validity if providedby an intermediary, flow-through entity, U.S. branch,foreign government, foreign central bank, or interna-tional organization; or if it is documentary evidencethat is generally not renewed or amended ‘‘such as acertificate of incorporation.’’

While relaxation of the refreshment requirement ishelpful, this rule does not alleviate initial documenta-tion requirements. Insurance companies will want toobtain all required documentation from new customersas they are on-boarded and confirm the accuracy ofthis documentation before making withholdable pay-ments.

‘Clarification’ or Reiteration?

Proposed RegulationsThe proposed regulations provided that the defini-

tion of a financial account includes any equity or debtinterest (other than interests that are publicly traded) inspecified financial institutions, including insurancecompanies, but ‘‘only if the value of the debt or equityinterest is determined, directly or indirectly, primarilyby reference to assets that give rise to withholdablepayments.’’7

ABA CommentsThe ABA comments noted that the proposed regula-

tions do not define what types of equity and debt in-struments are encompassed by this provision. The com-ments also pointed out that, if applied broadly, thisrule could apply to all foreign insurance companiesthat issue non-publicly traded stock because a primarydeterminant of the value of an insurance company’sstock is the value of the investment assets that the in-surance company holds. The ABA comments suggestedthat the provision be drafted narrowly as an antiavoid-ance rule that would apply only when it appears the

4Prop. reg. section 1.1471-4(d)(3).5Reg. section 1.1471-3(c)(6)(ii)(A).6Reg. section 1.1471-3(c)(6)(ii)(B). 7Prop. reg. section 1.1471-5(b)(1)(iii).

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primary purpose for the U.S. holder’s ownership of theequity or debt instrument is to avoid application ofchapter 4. The comments also requested that the finalregulations include specific examples illustrating thetypes of abusive situations the provision was designedto prevent.

OutcomeThe final regulations respond to those comments by:• describing what types of debt and equity interests

in an insurance company are financial accounts;and

• including an antiavoidance rule under which aninterest that is issued with ‘‘a principal purpose ofavoiding the reporting or withholding require-ments of chapter 4’’ is the type of debt or equityinterest that constitutes a financial account.8

Reg. section 1.1471-5(b)(3)(v) provides separate rulesfor debt and equity interests. For an equity interest in afinancial institution to constitute a financial account,the amount payable upon redemption must be eithersecured or determined (if an unsecured interest) pri-marily by reference to assets that give rise (or couldgive rise) to withholdable payments, that is, U.S.-sourcepayments of fixed or determinable annual or periodicincome or gross proceeds.9 For a debt interest in a fi-nancial institution to constitute a financial account,either:

• it must be convertible into U.S. stock;• interest payments (or the redemption/retirement

price) on the debt must be determined ‘‘primarilyby reference to’’ profits or assets of a U.S. person;or

• it must be secured by the assets of a U.S. per-son.10

While this clarification narrows the categories ofdebt and equity interests that might be considered fi-nancial accounts, there are still some open questions,and no examples of financial account-type debt andequity are provided. The preamble to the final regula-tions does clarify, however, that debt or equity interestsin holding companies and treasury centers of expandedaffiliated groups whose aggregate income is derivedprimarily from insurance companies are not financialaccounts.

Unfortunately, no examples are provided to illustratea ‘‘principal purpose’’ issuance of debt or equity thatwould be subject to the antiavoidance rule. That omis-sion may allow the IRS and Treasury flexibility tojudge each potential avoidance situation on facts andcircumstances as it arises — but it also breeds uncer-tainty regarding how not to run afoul of the rule. Ac-

cordingly, insurers will need to consider this somewhatamorphous antiavoidance rule when offering new in-vestments and when undergoing reorganizations or re-capitalizations.

Over the next year or so, we would expect Treasuryand the IRS to gain experience with the debt-equityissues of concern to them. Once that learning periodends, we would suggest that the IRS publish a noticeor revenue ruling that provides examples of both ac-ceptable and problematic arrangements under the anti-avoidance rule, with the goal of amplifying the anti-avoidance rule to facilitate compliance.

‘How Many Tests Does It Take . . . ?’


The proposed regulations define four categories offinancial institutions for purposes of FATCA, including‘‘an insurance company (or the holding company of aninsurance company) that issues or is obligated to makepayments with respect to a financial account.’’11 Underthe proposed regulations, financial accounts includeddepository accounts, custodial accounts, specified typesof equity and debt interest (discussed above), andCVICs and annuity contracts.

The proposed regulations did not specifically addressthe chapter 4 status of a non-U.S. company licensedand regulated as an insurance company under the lawsof its country of domicile that does not meet the defi-nition of an insurance company in prop. reg. section1.1471-1(b)(33). This might occur, for example, when acompany’s insurance premiums, reserves, or insuranceclaims payments for the year that its chapter 4 status isbeing determined are minimal compared with its in-vestment income, or when a company issues a substan-tial volume of insurance products that qualify as insur-ance for non-U.S. purposes but do not qualify asinsurance for U.S. federal income tax purposes.

ABA Comments

The ABA comments suggested that a non-U.S. in-surance company that does not issue CVICs or annuitycontracts should not be treated as an FFI under thenon-insurance FFI tests.

Outcome

The final regulations confirm that insurance com-panies that do not issue CVICs and annuities can beNFFEs.12

The final regulations adopt the terminology of theintergovernmental agreements (IGAs) and provide that

8Reg. section 1.1471-5(b)(1)(iii)(C)(1)-(2).9Reg. section 1.1471-5(b)(3)(v)(A).10Reg. section 1.1471-5(b)(3)(v)(B).

11Prop. reg. section 1.1471-5(e).12We note that a guaranteed investment contract gives rise to

a depository account under reg. section 1.1471-5(b)(3)(i), so theissuer of that contract likely has a FATCA reporting duty andpossibly a withholding obligation.



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a ‘‘specified insurance company’’ is an FFI. The finalregulations expressly do not adopt the ABA comments’recommendations on the broader point that insurancecompanies, which have their own FFI category, not besubject to all FFI tests. To the contrary, the preambleprovides that ‘‘an insurance company that is not aspecified insurance company must independently deter-mine whether it is a depository institution, custodialinstitution, or investment entity.’’ That rule perpetuatesthe uncertainty of FFI or non-FFI status for some in-surance companies that do not issue CVICs or annu-ities, have minimal underwriting income in a particularyear, or are in runoff.

The final regulations provide relief to some insur-ance companies in that the reserving activities of aninsurance company do not alone trigger FFI status.13

This explanation apparently is designed to address con-cerns about the status of runoff companies or compa-nies that have little premium income in a particularyear. Although the final regulations contain hundredsof definitions specific to FATCA, the term ‘‘reservingactivities’’ is not defined. It may be that formulating adefinition of reserving activities would be next to im-possible; indeed, Treasury and the IRS may appreciateadditional comments on this point. Because the typeand duration of an insurance company’s investmentactivities are directly keyed to its obligations under in-surance contracts, the ‘‘reserving’’ category likelycovers a broad range of activity.

Reinsurance ‘in the Clear’?

Proposed RegulationsA reinsurance exception provided in the proposed

regulations14 lacked the clarity sought by the industry.It excluded from the definition of cash value anamount payable under an insurance contract as a ‘‘ben-efit providing indemnification of an economic loss in-curred upon the occurrence of the event insuredagainst.’’ Industry tax professionals asked whether thismeant that life reinsurance covering cash value insur-ance or annuity contracts would be excluded. More-over, IRS officials commented in public forums that thereinsurance exception applied only to indemnity rein-surance but not to assumption reinsurance, in whichthe assuming reinsurer stands in the shoes of the ced-ing company, and assumes a direct relationship topolicyholders by collecting premiums and paying ben-efits directly. Assumption reinsurance is rarely used;indemnity reinsurance accounts for the vast majority ofreinsurance contracts.

ABA CommentsThe ABA comments sought greater clarity in the

exception for reinsurance from the definition of cash

value contracts treated as financial accounts. In Notice2010-60, 2010-37 IRB 329, the IRS acknowledged thatreinsurance does not present the threat of tax avoid-ance that is of concern under FATCA: ‘‘Treasury andIRS do not view the issuance of insurance and reinsur-ance contracts without cash value as implicating theconcerns of chapter 4.’’ Continuing, the notice saidthat the regulations will treat ‘‘entities whose businessconsists solely of issuing such contracts as non-financial institutions for purposes of chapter 4.’’

The ABA comments noted that a persuasive policyreason exists for creating an exception from the defini-tion of a financial account for reinsurance: Reinsur-ance is a business-to-business transaction between aceding insurance company and a reinsurer, and pay-ments under reinsurance contracts depend on the ced-ing company’s underwriting experience, not on the re-insurer’s investment experience. There is no directcontractual relationship between the assuming reinsurerand individual policyholders whose risks are coveredby the ceding company. Clearly, reinsurance does notpresent the opportunity for tax avoidance that is theconcern of FATCA.

OutcomeThe final regulations preserve the exclusion from

cash value for the benefits providing indemnification ofan economic loss. Also, reg. section 1.1471-5(b)(3)(vii)defines a financial account as an ‘‘insurance contract(other than an indemnity reinsurance contract between twoinsurance companies)’’ (emphasis added). A morecomplete statement of the rule distinguishing betweenindemnity and assumption reinsurance, or permittingan express exclusion for life reinsurance but not forassumption reinsurance, would have been preferable.For those who know the exception’s history, however,the final regulation is effective in clarifying that indem-nity reinsurance alone is insufficient to cause a non-U.S. entity to be an FFI.

Cash Value Clarified

Proposed RegulationsThe proposed regulations provided an exclusion

from cash value for:

a refund to the policyholder of a previously paidpremium under an insurance contract (other thanunder a life insurance or annuity contract) due topolicy cancellation, decrease in risk exposure dur-ing the effective period of the insurance contract,or arising from a redetermination of the premiumdue to correction of posting or other similar er-ror.15

This exclusion incorporates the definition of a re-turn premium from reg. section 1.832-4, which applies

13Reg. section 1.1471-5(e)(6).14Prop. reg. section 1.1471-5(b)(3)(v)(C)(1). 15Prop. reg. section 1.1471-5(b)(3)(v)(C)(2).



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to property and casualty insurance companies. Thisdefinition, however, does not describe all possible cir-cumstances in which an amount could be paid to acontract holder that is clearly not an investment returnor typical cash value.

The IRS had indicated its intent that return premi-ums on property and casualty and health insurancecontracts would not convert what is otherwise pureproperty and casualty insurance to a CVIC.

ABA CommentsThe ABA comments pointed out that some experi-

ence rating features of property and casualty contracts,such as retrospective credits and even medical loss ratiorebates, could be construed as cash value despite thisexception. The ABA comments suggested that a returnof premium under an insurance contract be excludedfrom cash value, as long as the return premium doesnot exceed the premiums paid under the contract.

OutcomeThe final regulations amend the exclusions from

cash value, as follows:• amounts payable solely by reason of the death of

the insured under a life insurance contract are ex-cluded;

• refunds of previously paid premium (net of thecost of insurance) are also excluded; and

• a return of advance premium or a premium de-posit is excluded as long as (1) the contract re-quires annual premiums and (2) the advance pre-mium or deposit does not exceed the next annualpremium payable.

Treasury and the IRS ‘‘did not accept commentsrequesting that return of premium be permitted to theextent it did not exceed the aggregate premiums paidfor the contract, without regard to mortality, morbidity,and expense charges,’’ and the preamble explained thatthose instruments ‘‘implicate the policy objectives ofchapter 4.’’ Nonetheless, with the overlay of thegreater-than-$50,000 minimum to qualify as cash value,these clarifications put to rest some of the most trou-bling questions about specific policy features that donot neatly fit within the return premium definition ofreg. section 1.832-4.

Some In-Scope Product Definitions Improved

Proposed RegulationsThe proposed regulations defined insurance con-

tracts by incorporating provisions under the code appli-cable to U.S. insurance contracts.16 For example, theproposed regulations defined an annuity contract as acontract that would be an annuity under section 72(without regard to subsections (s) and (u) and section

817(h)), and they defined a life insurance contract as acontract that satisfies section 7702 (without regard tosubsections (b), (c), and (d) and sections 101(f) and817(h)).

ABA CommentsThe ABA comments pointed out that the definitions

under the regulations must serve as the foundation forthe application of the FATCA regime to products is-sued by foreign insurance companies, which may notbe familiar with the tax regime applicable to U.S. tax-compliant products. There was concern that the pro-posed regulations did not provide clear definitions ofinsurance contracts that constitute ‘‘financial accounts’’sufficient to allow foreign insurance companies to de-termine the status of various contracts as financial ac-counts. The ABA comments suggested a simple, global,and inclusive approach be used in defining products,and they recommended that the definitions of annuitycontract and life insurance contract be grounded in thehome-country law applicable to those products.

OutcomeThe preamble to the final regulations states that in

response to comments, references to U.S. tax law ruleshave been replaced with plain language definitions, andthe final regulations incorporate, where appropriate,references to local law definitions and practices. Note,however, that the applicable definitions in the finalregulations may be supplanted by the terms of an ap-plicable IGA. The final regulations clarify and expandthe definition of annuity contract and clarify the defini-tion of life insurance contract in reg. section 1.1471-1(b)(5), (25), (56), (58), (65), (68), and (69).

Although the final regulations adopt the suggestionthat the definitions not incorporate U.S. tax law provi-sions and strive for plain language definitions, the addi-tion of multiple sub-definitions of types of annuitycontracts may complicate matters. Proper applicationunder relevant home-country law may have to be ad-dressed through an applicable IGA for products thatdon’t fit neatly within one of the more specific annuitydefinitions. The final regulations provide the followingdefinitions applicable to annuity contracts:

• reg. section 1.1471-1(b)(5): annuity contract;

• reg. section 1.1471-1(b)(25): deferred annuity con-tract;

• reg. section 1.1471-1(b)(56): group annuity con-tract;

• reg. section 1.1471-1(b)(58): immediate annuity;

• reg. section 1.1471-1(b)(65): investment-linked an-nuity contract; and

• reg. section 1.1471-1(b)(68): life annuity contract.

The final regulations provide a single definition oflife insurance contract at reg. section 1.1471-1(b)(69).Unlike the definition of annuity contract, it does notreference home-country law but similarly clarifies thatU.S. tax law definitions are not relevant:16Prop. reg. section 1.1471-1(b)(4) and (b)(35).



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Life insurance contract. The term life insurance con-tract means an insurance contract under whichthe issuer, in exchange for consideration, agreesto pay an amount upon the death of one or moreindividuals. That a contract provides one or morepayments (for example, for endowment benefitsor disability benefits) in addition to a death ben-efit will not cause the contract to be other than alife insurance contract. For purposes of the pre-ceding sentence, it is immaterial whether a con-tract satisfies any of the substantive U.S. tax rules(for example, sections 101(f), 817(h), 7702, orinvestor control prohibition) applicable to thetaxation of the contract holder or issuer.

The final regulations are generally consistent withthe recommendations made by the ABA comments.Issues may arise concerning alignment of the multipleannuity definitions with specific types of foreign prod-ucts, but in many instances those issues may be re-solved through the terms of an applicable IGA, whichwould supplant the definitions provided by the finalregulations.

Cash Value Insurance Contracts


The proposed regulations define a cash value insur-ance contract, which is a financial account for FATCApurposes, as an insurance contract that has a cashvalue of greater than zero.17 Cash value means thegreater of the amount the policyholder is entitled toreceive on surrender or termination of the contract (de-termined without reduction for any surrender charge orpolicy loan) and the amount the policyholder can bor-row under or regarding the contract.18 The proposedregulations include some exceptions to cash value, in-cluding amounts payable as a personal injury or sick-ness benefit, some premium refunds, and some policy-holder dividends (as defined in section 808 but withoutregard to paragraph (b)(2) of that section). Some termlife insurance contracts are excluded from the defini-tion of CVIC.19

ABA Comments

The ABA comments noted that the proposed regula-tions’ definition of CVIC is too broad in some placesand too narrow in others. Several suggestions weremade to assist in narrowing and refining the scope ofthe contracts that would be captured. First, the ABAcomments suggested including a de minimis exceptionto cash value, which would still allow the IRS andTreasury to obtain relevant information regarding thetypes of accounts FATCA is meant to target. For pur-

poses of clarification, the ABA comments recom-mended that the definition of insurance contract begrounded in the home-country law applicable to thoseproducts and that the definition of term life insurancecontract be revised to encompass all contracts provid-ing traditional term life insurance protection, regardlessof whether premiums are payable annually or morefrequently while the contract is in force.

Outcome

The final regulations adopt some of the suggestionsprovided in the ABA comments and reject others. Thefinal regulations provide a $50,000 exception forCVICs by amending the definition of a CVIC to re-quire a minimum cash value greater than $50,000. Ag-gregation rules apply when determining whether thistheshold is met.20 The final regulations also provide,presumably for administrative convenience, that a par-ticipating FFI may elect to disregard the $50,000threshold by reporting all contracts with a cash valuegreater than zero.

The final regulations, at reg. section 1.1471-1(b)(61),include a definition of insurance contract for purposesof FATCA:

Insurance contract. The term insurance contractmeans a contract (other than an annuity contract)under which the issuer in exchange for considera-tion agrees to pay an amount upon the occur-rence of a specified contingency involving mortal-ity, morbidity, accident, liability, or property risk.

The intersection between the definition provided andhome-country law will presumably have to be sortedout through IGAs. The final regulations do notbroaden the exclusion of term life insurance to includeall contracts providing traditional term life insuranceprotection, although they do narrow the types of con-tracts being captured under the cash value provisionsby excepting both term life insurance contracts andindemnity reinsurance contracts from the CVIC defini-tion.

The relationship between the final regulations’ defi-nition of term life insurance and otherwise traditionalterm life insurance that is apparently targeted for inclu-sion in the cash value analysis is not immediately evi-dent; it is unclear why any type of term life contractswould be treated as having cash value. However, thefinal regulations provide that a term life insurance con-tract must provide for periodic premiums, which donot decrease over time and are payable at least annu-ally during the period the contract is in existence oruntil the insured reaches age 90, whichever is shorter.The final regulations also impose restrictions on theability to access contract value without terminating thecontract, and they specify that the amount (other than

17Prop. reg. section 1.1471-5(b)(3)(v)(A).18Prop. reg. section 1.1471-5(b)(3)(v)(B) and (C).19Prop. reg. section 1.1471-5(b)(2)(ii). 20Reg. section 1.471-5(b)(3)(vii) and (b)(4)(iii).



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a death benefit) payable upon cancellation or termina-tion of the contract cannot exceed the aggregate premi-ums paid for the contract, less the sum of mortality,morbidity, and expense charges (whether or not actu-ally imposed) for the period or periods of the contract’sexistence and any amounts paid before the cancellationor termination of the contract. Finally, a term life in-surance contract is not excepted from the definition ofcash value insurance contract if it is held by a trans-feree for value.

With the exception of setting a $50,000 de minimisexclusion for CVICs, the final regulations generally donot adopt the ABA comments. The revised definitionof term life insurance contract may preserve some ofthe U.S.-foreign product disconnect in that productsproviding traditional term life coverage in foreign juris-dictions but not requiring annual or more frequent pre-mium payments during the term of the policy or to age90 do not qualify for the term life exception to finan-cial account status.

Currency Translation Clarified

Proposed RegulationsThe proposed regulations require FFIs to determine

and report account values at the outset of their FFIagreements and as part of their ongoing reporting re-quirements. For non-U.S. entities, accounts may bekept in U.S. dollars or another country’s currency. Therules in the proposed regulations for converting theaccount values of non-U.S.-dollar-denominated ac-counts to U.S. dollars are varied. Conversion to U.S.dollars is required for initial due diligence but not nec-essarily required for other instances in which accountvalue must be calculated.

ABA CommentsThe ABA comments recommended that the IRS

publish the applicable spot rate used for convertingnon-U.S.-dollar-denominated account balances to U.S.dollars for preexisting accounts as of an FFI’s first yearof determination, and periodically thereafter for newFFIs entering the FATCA compliance regime, to facili-tate an FFI’s implementation of the due diligence andreporting requirements.

OutcomeRather than implementing a mechanism for publish-

ing spot rates, the final regulations provide generallythat the account values may be reported in U.S. dollarsor in the currency in which the account is denomi-nated. The final regulations provide rules applicable tothe calculation of the account balance or value for de-termining whether an account meets (or continues tomeet) applicable FATCA thresholds. The spot rate tobe used is the rate for the date for which the FFI isdetermining the threshold amount. The spot rate mustbe determined as of the last day of the calendar year(or, for an annuity, the most recent contract or anniver-sary date, when applicable) for which the account is

being reported or, if the account was closed during thecalendar year, the date the account was closed.

Although the final regulations provide more clarityand consistency in connection with calculating accountbalances and currency conversion, they do not adoptthe suggestion that the IRS publish the applicable spotrate in an annual publication.

No Surprise, Disappointment: Premiums


The insurance industry was alarmed by the pro-posed regulations’ classification of insurance premiumsas withholdable payments subject to withholding forFATCA purposes. Historically, cross-border outboundinsurance and reinsurance premiums have been ex-cepted from withholding for chapter 3 purposes be-cause they generally are subject to the federal excisetax under section 4371.21 That exception applies to lifeand annuity, property-casualty, and reinsurance premi-ums paid to foreign insurers. Under the proposed regu-lations, however, a withholdable payment includesFDAP income,22 and FDAP income is defined by refer-ence to reg. section 1.1441-2(b)(1) or -2(c),23 which in-cludes insurance premiums.

ABA Comments

The ABA comments recognized that treating lifeand annuity premiums as withholdable payments had asound rationale, because it provided the governmentleverage in persuading FFIs to register with the IRS toavoid withholding. However, because a property-casualty insurer and a reinsurer write products that arenot financial accounts, and therefore would not other-wise be FFIs, the comments argued that an exceptionshould be granted for property-casualty and reinsur-ance premiums.

Outcome

The preamble to the final regulations states that in-surance and reinsurance premiums:

are exempt under chapter 3, however, because theexcise tax under section 4371 is an adequate sub-stitute for tax on the business income of a foreignissuer. In contrast, withholding under chapter 4 isintended as an incentive to FFIs to become par-ticipating FFIs, rather than as a proxy for the taxon the income of the issuer. As a result, thepolicy reasons for the exclusion of such insuranceand reinsurance premiums for purposes of chap-ter 3 withholding are not relevant for chapter 4withholding. The final regulations therefore donot adopt this comment.

21Reg. section 1.1441-2(a)(7).22Prop. reg. section 1.1473-1(a)(1)(i).23Prop. reg. section 1.1473-1(a)(2)(i)(A).



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Given that these premiums would ordinarily be paidas a routine accounts payable function, the inclusion isneither logical (these payments are nonfinancial underthe rules) nor functional. Although the preamble doesnot explain the rationale further, an additional factormay have been the desire to collect the names of anysubstantial U.S. owners of non-U.S. property-casualtyand reinsurance companies. Property-casualty insurersand reinsurers (and life insurers that do not write cashvalue life insurance and annuity contracts) are NFFEs,which are required to provide the withholding agentthe names of their substantial U.S. owners,24 unless theyare part of a publicly traded group.25 The publiclytraded exception should cover most large insurers.Nonetheless, agents, brokers, and insurers will be re-quired to determine the FATCA status of foreign insur-ance companies before transmitting premium pay-ments, and they will need to maintain records of apayee’s status to demonstrate their compliance withFATCA.

Does the Code Mean What It Says?

Proposed RegulationsAlthough it seemed clear to practitioners that a con-

trolled foreign corporation insurance company thatelects to be taxed as a U.S. company under section953(d) (a section 953(d) company) is not an FFI be-cause those companies are treated as domestic corpora-tions for all purposes of the code, the proposed regula-tions did not specifically address the status of thosecompanies. The code and proposed regulations pro-vided that an FFI is any financial institution that is aforeign entity, and an NFFE is a foreign entity that isnot a financial institution. A foreign entity, as definedunder the code and proposed regulations, constitutesany entity that is not a U.S. person. A U.S. person, inturn, is defined by section 7701(a)(30) as including adomestic corporation. If a CFC that is an insurancecompany makes an election under section 953(d)(1),‘‘for purposes of [Title 26], such corporation shall betreated as a domestic corporation.’’

ABA CommentsNoting that although it seemed clear under the code

and proposed regulations that a section 953(d) com-pany was not an FFI, the ABA comments recom-mended that the final regulations explicitly address thatpoint. They requested that a foreign insurance com-

pany that is a section 953(d) company be explicitly ex-cluded from the definition of an FFI. The ABA com-ments suggested that there is no material reason totreat those insurers any differently from domestic in-surers, noting that section 953(d) companies are subjectto all the reporting obligations of a domestic insurancecompany.

OutcomeThe final regulations reject the suggestion to treat

section 953(d) companies as U.S. companies for pur-poses of FATCA.

Reg. section 1.1471-1(b)(132) defines the term ‘‘U.S.person’’ or ‘‘United States person’’ as a person de-scribed in section 7701(a)(30), the U.S. government (in-cluding an agency or instrumentality thereof), a state(including an agency or instrumentality thereof), or theDistrict of Columbia (including an agency or instru-mentality thereof). The regulation further provides thatthe determination of whether an insurance company isa U.S. person is made ‘‘without regard to an electionby a company not licensed to do business in any Stateto be subject to U.S. income tax as if it were a domes-tic insurance company.’’ Thus, a foreign insurancecompany not licensed to do business in any state thatelects under section 953(d) to be subject to U.S. incometax as if it were a U.S. insurance company is not aU.S. person for FATCA purposes.

The preamble explains why the final regulations’treatment of a section 953(d) company contradicts theplain language of section 953(d), which provides thatan electing corporation ‘‘shall be treated’’ as a domesticinsurance company for purposes of Title 26 (emphasisadded):

How a foreign insurance company and its UnitedStates shareholders are taxed is immaterial to theneed for reporting with regard to insurance orannuity contracts issued by the insurance com-pany to its customers. Therefore, the final regula-tions provide that the term U.S. person does notinclude an insurance company that has made anelection under section 953(d) if the company isnot licensed to do business in any State. How-ever, a foreign insurance company that has madean election under section 953(d) and is licensedto do business in the United States would be con-sidered, for purposes of chapter 4, a U.S. personand, therefore, would remain subject to reportingwith respect to its life insurance and annuity con-tracts under section 6047(d), not chapter 4.

The final regulations provide that for purposes ofsections 1471 through 1474 and the regulations there-under, the term ‘‘U.S. person’’ does not include an in-surance company that has made an election under sec-tion 953(d) if the company is not licensed to dobusiness in any state. In light of the ABA commentsand other comments, however, the final regulationspermit an insurance company participating FFI that isnot licensed in any state to elect to report its chapter 4

24A substantial U.S. owner is any U.S. person owning morethan 10 percent of the stock of a corporation by vote or value,or more than 10 percent of the shares of a partnership, or morethan 10 percent of the beneficial ownership of a trust. Reg. sec-tion 1.1473-1(b)(1).

25Reg. section 1.1472-1(c)(1)(i). The publicly traded companymust provide a withholding certificate certifying that it is pub-licly traded and giving the name of the exchange on which itsstock is traded.



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account information in a manner similar to section6047(d) reporting.26 Under the election, an insurancecompany participating FFI reports the sum of cashvalue or an annuity contract’s account balance or valueand any amount paid under the contract as a gross dis-tribution in box 1 of Form 1099-R. The participatingFFI can then check box 2b to indicate that the taxableamount is not determined.

While the final regulations appear to provide flex-ibility to section 953(d) companies, the code’s rule thata section 953(d) company is treated as a U.S. insurancecompany for all purposes of Title 26 trumps the de-fault rule in the final regulations, which would treatthem as non-U.S. entities.

Conclusion

Clarity, OverallThe final regulations provide much-needed clarifica-

tions of the insurance-specific FATCA definitions thatare necessary for U.S. insurers to be able to identifywithholdable payments and categorize their payees.The final regulations also provide many insurance-specific definitions and rules that are critical for non-U.S. insurers to be able to determine their FFIs, theirNFFEs, and their financial accounts, which, in turn,influence due diligence and reporting requirements.While not all the final rules that emerged were idealfor the industry, the IRS and Treasury were very re-sponsive to the ABA comments specifically, and insur-ance industry comments generally.

Attempted clarification did not come to fruition,however, concerning the types of debt and equity inter-ests in insurance companies that will constitute finan-cial accounts. Instead, the addition of a blanket anti-avoidance rule without specific examples has muddied

this category of potential financial accounts. Hopefully,as the IRS and Treasury gain experience with situa-tions that may be viewed as ‘‘avoidance’’ driven, theywill provide additional guidance around the blanketantiavoidance rule in the form of a notice or revenueruling.

The Role of IGAs Should Not Be UnderestimatedThe IGAs provide some relief from some of the

major problems facing global insurance companies, forexample, the conflict of laws between European pri-vacy rules and FATCA reporting requirements and thepotentially exorbitant cost of searching preexisting fi-nancial accounts for U.S. indicia. Importantly, somedefinitions and concepts in the final regulations may besupplanted by, or refined by, the specific terms of anapplicable IGA. This parallel IGA process will allowadditional, country-specific clarification and workabil-ity to occur without subsequent amendments to theFATCA regulations.

Now, the GrousingWe would suggest that the IRS and Treasury recon-

sider their position that a section 953(d) company is,for starters, a non-U.S. entity. That position contradictsthe plain language of the code, which provides that anelecting company is a U.S. person for all purposes ofTitle 26. Moreover, we believe that categorizing section953(d) companies differently depending on whetherthey have a license to conduct business in any state isarbitrary and would not withstand judicial scrutiny. Ifthe IRS and Treasury have specific concerns, such asidentifying non-admitted captives or finding offshoreseparate account products, they should be a bit moretransparent in expressing those concerns and work withthe industry to address them — rather than attempt tooverride the code in a Treasury regulation that dealswith information reporting.

Next Steps

The final regulations are responsive to insuranceindustry input, even if companies don’t like how theIRS and Treasury came out on some issues. Work re-mains to be done, however, and hopefully the IRS andTreasury will continue to encourage and engage in on-going, constructive dialogues with the industry. ◆

26Section 6047(d) does not apply to separate account report-ing until a distribution occurs. The administration’s 2013 budgetproposal suggests amending the code to require that reporting.Joint Committee on Taxation, ‘‘Description of Revenue Provi-sions Contained in the President’s Fiscal Year 2013 Budget Pro-posal,’’ JCS-2-12 (June 2012), at 574-576. Similar proposals alsowere made for fiscal 2001 and for fiscal 2010 through 2012.



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Documents

FATCA Regs Responsive to Some, But Not All, Insurer Concerns · 2REG-121647-10. 3The authors of this article drafted the ABA comments along with two other attorneys. See ‘‘ABA