New Bill Would Exempt Premiums Paid on Non-Cash-Value Property Insurance From FATCA Withholding

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October 13, 2016

Rep. Edward R. Royce (R-Calif.) recently introduced in the House of Representatives a bill that would exempt premiums paid on non-cash-value property and casualty insurance from coverage under the Foreign Account Tax Compliance Act (FATCA).  Specifically, H.R. 6159 would amend the definition of “withholdable payment,” to which FATCA reporting and withholding rules apply, under Code Section 1473(1) to exempt premiums paid for any insurance contract that has an aggregate cash value of zero or less, and that is not considered for purposes of determining whether the insurance company is a life insurance company under Code Section 816.  Cash value generally means the amount that is payable to the policyholder upon policy surrender or termination, or that can be borrowed, except that cash value does not include any death, sickness, or casualty loss benefit, refund of and dividends not exceeding premiums paid (less cost of insurance charges), and certain advance premium or deposit.  In other words, the proposed bill would exclude from FATCA coverage premiums paid on property and casualty insurance that does not have an investment or earnings component.

Currently, FATCA withholding potentially applies to all insurance premiums, regardless of whether the premiums are for life insurance, annuities, or property and casualty coverage, if the payments are made to a nonparticipating FFI or passive NFFE.  However, many non-U.S. property and casualty insurers are excepted NFFEs that are not subject to withholding.  The proposed legislation would streamline the documentation process required for withholding agents making property and casualty insurance premium payments for U.S. risks as the withholding agents would no longer be required to document the FATCA status of the insurance company they are paying.  Because such premiums are generally not subject to Chapter 3 withholding, the premium payments could in many cases be made without the need for a Form W-8BEN-E from the insurer.  Some insurance buyers currently pay premiums to foreign insurance companies through a U.S. insurance broker to avoid the requirement to collect documentation from non-U.S. insurers because the FATCA rules treat such payments as a payment to a U.S. person, provided that the buyer does not know or have reason to know that the broker will not comply with its withholding obligations under FATCA.