Disallowance of deduction for excess non-taxed reinsurance premiums paid to affiliates

(a)

In general

Subsection (b) of section 832 of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:

(9)

Limitation on deduction for excess non-taxed reinsurance premiums paid to affiliates

(A)

In general

No deduction shall be allowed under paragraph (4) for so much of the affiliated non-taxed reinsurance premiums paid by a covered insurance company during the taxable year as exceeds the sum of— (i)the premium limitation for such taxable year, plus (ii)the qualified ceding commissions with respect to such premiums. (B)

Affiliated non-taxed reinsurance premiums

For purposes of this paragraph— (i)

In general

The term affiliated non-taxed reinsurance premium means any reinsurance premium paid directly or indirectly to an affiliated corporation if, with respect to such affiliated corporation, such premium is neither subpart F income (as defined in section 952) nor subject to tax under this subtitle. (ii)

Netting of premiums paid to covered insurance company by affiliates

The amount of premiums which would (but for this clause) be treated as affiliated non-taxed reinsurance premiums with respect to any affiliated corporation for any taxable year shall be reduced (but not below zero) by any reinsurance premiums paid directly or indirectly to the covered insurance company by such affiliated corporation during such taxable year. (iii)

Premiums treated as non-taxed to extent of treaty reduction

Rules similar to the rules of section 163(j)(5)(B) shall apply for purposes of determining the extent to which tax is imposed by this subtitle with respect to any premium. (C)

Premium limitation

For purposes of this paragraph— (i)

In general

The term premium limitation means, with respect to any covered insurance company for any taxable year, the excess of— (I)the product of the gross premiums written by such covered insurance company on insurance contracts during the taxable year multiplied by the industry fraction for such taxable year, over (II)the aggregate reinsurance premiums paid by such covered insurance company during the taxable year which are not affiliated non-taxed reinsurance premiums.

Such limitation shall not be less than zero.

(ii)

Industry fraction

In the case of any taxable year beginning in a calendar year, the term industry fraction means the fraction, determined by the Secretary on the basis of published aggregate data from annual statements of insurance companies— (I)the numerator of which is the aggregate reinsurance premiums paid by covered insurance companies to non-affiliated corporations during the second preceding calendar year, and (II)the denominator of which is the aggregate gross premiums written by covered insurance companies during such second preceding calendar year. (iii)

Separate application to each line of business

With respect to each line of business— (I)the Secretary shall determine a separate industry fraction with respect to each such line of business, and (II)subparagraph (A) shall be applied separately to each such line of business by taking into account the industry fraction determined with respect to such line of business. (D)

Qualified ceding commission

For purposes of this paragraph, the term qualified ceding commission means, with respect to the affiliated non-taxed reinsurance premiums paid by a covered insurance company during any taxable year, the product of— (i)the ceding commissions which are paid to such company with respect to such premiums and which are included in income of such company, multiplied by (ii)a fraction— (I)the numerator of which is so much of such premiums as exceeds the premium limitation for such taxable year, and (II)the denominator of which is the aggregate amount of such premiums. (E)

Election to treat reinsurance income as effectively connected

(i)

In general

A specified affiliated corporation may elect for any taxable year— (I)to treat specified reinsurance income as income effectively connected with the conduct of a trade or business in the United States, and (II)to be treated as carrying on an insurance business within the United States. (ii)

Specified affiliated corporation

For purposes of this subparagraph, the term specified affiliated corporation means any affiliated corporation which— (I)is a foreign corporation which would qualify under part I or this part for the taxable year if it were a domestic corporation, (II)waives all benefits granted by the United States under any treaty between the United States and any foreign country with respect to specified reinsurance income with respect to which the election under clause (i) applies, and (III)meets such requirements as the Secretary shall prescribe to ensure that tax on such income is properly determined and paid. (iii)

Specified reinsurance income

For purposes of this subparagraph, the term specified reinsurance income means, with respect to any specified affiliated corporation for any taxable year— (I)all reinsurance premiums which would (but for the election made under this subparagraph) be affiliated non-taxed reinsurance premiums and which are received by such corporation during such taxable year directly or indirectly from covered insurance companies with respect to which such corporation is affiliated, and (II)so much of the net investment income (within the meaning of section 842(b)) for such taxable year as is allocable to reinsurance premiums with respect to which an election under clause (i) applies for such taxable year or any prior taxable year. (iv)

Rules related to election

Any election under clause (i) shall— (I)be made at such time and in such form and manner as the Secretary may provide, and (II)apply for the taxable year for which made and all subsequent taxable years unless revoked with the consent of the Secretary. (F)

Other definitions and special rules

For purposes of this paragraph— (i)

Covered insurance company

The term covered insurance company means any insurance company subject to the tax imposed by section 831. (ii)

Treatment of controlled group

All domestic members of a controlled group of corporations (as defined in section 1563) of which a covered insurance company is a member shall be treated as one corporation. (iii)

Affiliated corporations

A corporation shall be treated as affiliated with a covered insurance company if both corporations are members of the same controlled group of corporations, as defined in section 1563(a) except that— (I)more than 25 percent shall be substituted for at least 80 percent each place it appears in section 1563(a)(1), and (II)the determination shall be made without regard to subsections (a)(4), (b)(2)(C), (b)(2)(D), and (e)(3)(C) of section 1563. (iv)

Treatment of reinsurance assumed by covered insurance company

Reinsurance ceded by a non-affiliated corporation to a covered insurance company shall be taken into account in the same manner as premiums written by such covered insurance company. (G)

Regulations

The Secretary shall prescribe such regulations as may be appropriate to carry out or to prevent the avoidance of the purposes of this paragraph, including regulations which provide for the application of this section to alternative reinsurance transactions, fronting transactions, conduit and reciprocal transactions, and any economically equivalent transactions.

(b)

Effective date

The amendment made by this section shall apply to taxable years beginning after December 31, 2009.