GUIDELINES ESTABLISHED FOR SECURING TREATY-BASED EXEMPTION TO EXCISE TAX ON PREMIUMS PAID TO GERMAN INSURERS.

Rev. Proc. 92-39

SECTION 1. PURPOSE

This revenue procedure provides instructions for establishing exemption from the section 4371 excise tax on insurance premiums paid to a foreign insurer or reinsurer when the exemption is based on the provisions of the Convention Between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes (the "Convention").

SEC. 2. BACKGROUND

01 Section 4371 of the Internal Revenue Code generally imposes a tax on each policy of insurance or reinsurance issued by any foreign insurer or reinsurer, unless the premiums paid are taxed as income effectively connected with the conduct of a United States trade or business.

02 Section 4374 of the Code provides that the tax imposed by section 4371 shall be paid by any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for whose use or benefit the same are made, signed, issued or sold.

03 Section 46.4374-1(a) of the Excise Tax Regulations provides that the tax imposed by section 4371 of the Code shall be paid on the basis of a return. Such tax shall be remitted by the person who makes the payment of the premium to a foreign insurer or reinsurer or to any nonresident agent, solicitor, or broker. The phrase "person who makes the payment" means the resident person who actually transfers the money, check, or its equivalent to the foreign insurer or reinsurer (including transfers to any bank, trust fund, or similar recipient designated by the foreign insurer or reinsurer), or to any nonresident agent, solicitor, or broker.

04 Pursuant to treaties between the United States and several countries, policies issued by a foreign insurer or reinsurer that is a resident of any of such countries may be exempt from the tax imposed by section 4371 of the Code. One such treaty is the Convention.

SEC. 3. EXEMPTION PROCEDURE

01 A person otherwise required to remit the excise tax on account of premiums paid to a foreign insurance or reinsurance company on or after January 1, 1990 if attributable to premiums paid to an insurer or reinsurer that was a resident of the territory comprising the Federal Republic of Germany prior to October 3, 1993, or that part of Berlin in which the Basic Law of the Federal Republic of Germany applied before October 3, 1990; or on or after January 1, 1991 if attributable to premiums paid to an insurer or reinsurer that was a resident of the territory comprising the former German Democratic Republic or that part of Berlin in which the Basic Law of the Federal Republic of Germany did not apply until October 3, 1990, may consider the premiums paid to the foreign insurer or reinsurer exempt under the Convention if the conditions of paragraph .02 of this section are satisfied. In addition, the local tax office ("Finanzamt") with which the insurer or reinsurer files its German tax returns must certify that the foreign insurer or reinsurer has been a resident of Germany (1) during the three months preceding the taxable period in which the premiums are paid to the foreign insurance company, or (2) during the taxable period. Such certification may be in the form of a list compiled by the Finanzamt with which the insurer or reinsurer files its returns of all insurers or reinsurers that were residents. A copy of such a list or of any individual certification upon which an exemption is based must be retained by the person required to remit the excise tax. The person required to remit the excise tax may not consider the premiums exempt if prior to filing the return for the taxable period such person has knowledge that the foreign insurer or reinsurer did not qualify for benefits under the Convention during the taxable period.

02 The person otherwise required to remit the tax may consider the premiums exempt if, prior to filing the return for the taxable period, such person has knowledge that the foreign insurer or reinsurer has satisfied the requirements of section 3.01 and that there was in effect for such taxable period a closing agreement between the Internal Revenue Service and the foreign insurer or reinsurer as provided by section 3.11. As part of the closing agreement, the foreign insurer or reinsurer must agree to be liable as a United States taxpayer for Federal excise tax under section 4371 of the Code if it is determined that premiums paid to the foreign insurer or reinsurer are not entitled to exemption under the Convention from the tax imposed by section 4371 of the Code.

03 Premiums paid on policies written by a foreign insurer or reinsurer cannot qualify for exemption from the excise tax under the Convention to the extent that the risks covered by such premiums are reinsured with a person not entitled to the benefits of the Convention or another convention that provides exemption from such excise tax (Article 2(1) of the Convention).

04 Premiums paid on policies written by a foreign insurer or reinsurer cannot qualify for exemption from the excise tax under the Convention, unless the foreign insurer or reinsurer establishes that it satisfies the requirements of section 3.05, 3.06, 3.07, both 3.08 and 3.09, or 3.10.

05 Premiums paid on policies written by a foreign insurer or reinsurer may qualify for exemption from the excise tax under the Convention if the foreign insurer or reinsurer is a company in whose principal class of shares there is substantial and regular trading on a recognized stock exchange (within the meaning of Article 28(1)(d) of the Convention). The term "recognized stock exchange" is defined in Article 28(3) of the Convention.

06 Premiums paid on policies written by a foreign insurer or reinsurer may qualify for exemption under the Convention if the insurer or reinsurer establishes that it is engaged in the active conduct of a trade or business in Germany under this section 3.06, and that such premiums are derived in connection with, or are incidental to, that trade or business (within the meaning of Article 28(1)(c) of the Convention). For closing agreement purposes, the Internal Revenue Service will consider premiums received by a foreign insurer or reinsurer to be derived in connection with, or be incidental to, the active conduct of a trade or business in Germany by the company if for the company's preceding taxable year the average of the following three ratios exceeds 25 percent and each ratio is equal to at least 20 percent:

(1) The ratio of the average value that the assets of the insurer or reinsurer used or held for use in the active conduct of a trade or business in Germany during the taxable year bears to the value of all its assets. For this purpose, the value of an asset shall be determined using the method used by the taxpayer in keeping its books for purposes of financial reporting in Germany. If the insurer is not subject to financial reporting in Germany, the value of an asset will be determined under generally accepted accounting principles applied in Germany. The average value of the assets for the taxable year equals the average of the values of the assets determined as of the end of each quarterly period during the taxable year. An asset shall be treated as used or held for use in a trade or business in Germany if so treated under section 1.367(a)-2T(b)(5) of the Income Tax Regulations and if an office or other fixed place of business in Germany is a material factor in the acquisition of the asset and in the realization of income, gain or loss with respect to the asset. In addition, a tangible asset used or held for use in a trade or business in Germany shall be treated as located in Germany only if physically located there.

(2) The ratio that gross premiums received by the insurer or reinsurer for policies on risks situated in Germany bear to total gross premiums received by the insurer or reinsurer;

(3) The ratio that the insurer or reinsurer's payroll and commission expense paid to employees and agents for services performed in Germany bears to the insurer or reinsurer's worldwide payroll and commission expense.

07 If premiums received by a foreign insurer or reinsurer do not qualify under the ratio test in section 3.06, the Internal Revenue Service may nevertheless determine that such premiums qualify for closing agreement purposes, as derived in connection with, or incidental to, the active conduct of a trade or business in Germany on the basis of the following information:

(1) The address of the insurer or reinsurer's office in Germany;

(2) The ratio that the insurer or reinsurer's payroll and commission expense paid to employees and agents for services performed in Germany bears to the insurer or reinsurer's worldwide payroll and commission expense;

(3) Whether the insurer or reinsurer's employees and agents in Germany have, and habitually exercise, authority to sign policies and to approve payment of claims on the company's behalf;

(4) Whether the insurer or reinsurer is subject to the national income tax imposed by Germany on the basis of residence;

(5) The ratio that gross premiums received by the insurer or reinsurer for policies on risks situated in Germany bear to total gross premiums received by the insurer or reinsurer;

(6) The ratio that gross premiums received by the insurer or reinsurer for policies on risks situated in Germany bear to gross premiums received for policies on risks situated in the United States;

(7) The ratio that the value of the assets of the insurer or reinsurer used or held for use in the active conduct of a trade or business in Germany at the close of the taxable year bears to the value of all of its assets at the close of the taxable year;

(8) Whether the insurer or reinsurer is subject to the German government regulations generally applicable to companies authorized to insure or reinsure risks situated in Germany;

(9) The percentage of the insurer or reinsurer's shares of outstanding stock of each class not owned by persons entitled to benefits under the Convention or, in the case of a mutual company, the percentage of the insurer or reinsurer's policies insuring risks of persons not entitled to benefits under the Convention;

(10) The percentage of the insurer or reinsurer's gross income (including investment income attributable to its insurance business but excluding investment income not attributable to its insurance business) used, directly or indirectly, to meet liabilities to persons not entitled to benefits under the Convention. For purposes of this test, the term "liabilities" refers to amounts that reduce gross premiums or are deductible against gross income, including interest, royalties, and premiums paid in connection with reinsuring risks; and

(11) Any other information indicating that the insurer or reinsurer is engaged in the active conduct of a trade or business in Germany.

08 Alternatively, premiums received by a foreign insurer or reinsurer may qualify for exemption under the Convention if the insurer or reinsurer satisfies the requirements of section 3.09 and establishes that, at all times during the taxable period, more than 50 percent of the number of shares of each class of its shares (or more than 50 percent of the beneficial interest in the case of a mutual company) is owned, directly or indirectly, by any combination of one or more citizens of the United States or individual residents of Germany or the United States; a Contracting State or a political subdivision or local authority thereof; a company in whose principal class of shares there is substantial and regular trading on a recognized stock exchange; or an entity which is a not-for-profit organization described in Article 28(1)(f) of the Convention (Article 28(1)(e)(aa) of the Convention). In applying this test, shares that are not registered to a named shareholder of the foreign insurer or reinsurer or of an intermediary company will be considered owned directly or indirectly by an individual who is neither a citizen of the United States nor a resident of either Germany or the United States.

09 Under the alternative test set forth in section 3.08, a foreign insurer or reinsurer must also establish that not more than 50 percent of its gross income is used, directly or indirectly to meet liabilities to persons not entitled to benefits under Article 28(1)(a), (b), (d), or (f) (Article 28(1)(e)(bb) of the Convention). The terms "gross income" and "liabilities" have the same meaning as in section 3.07(10).

10 If the foreign insurer or reinsurer cannot establish that premiums paid to it qualify for exemption from the excise tax under section 3.05, 3.06, 3.07, or both 3.08 and 3.09, the United States competent authority may nevertheless determine that the foreign insurer or reinsurer should be granted the benefits of the Convention (Article 28(2) of the Convention).

11 A foreign insurer or reinsurer that wishes to have its premiums considered exempt from the excise tax under the Convention must enter into the following form of closing agreement:

CLOSING AGREEMENT OF FINAL DETERMINATION COVERING SPECIFIC MATTERS

Under section 7121 of the Internal Revenue Code, __________ (Taxpayer's name, address, and identifying number; if taxpayer has no identifying number, indicate date of application for number) and the Commissioner of Internal Revenue make the following closing agreement:

WHEREAS, the business profits article (Article 7 of the United States-Germany Income Tax Convention (the "Convention") exempts insurance or reinsurance premiums paid to a resident of Germany from the Federal excise tax imposed by section 4371 et seq. of the Internal Revenue Code of 1986, as amended (the "Code") only to the extent that the German insurer or reinsurer does not reinsure such risks with a person not entitled to exemption from such tax under the Convention or another convention (Article 2(1)(a) of the Convention) and only if the insurer or reinsurer qualifies under Article 28 of the Convention;

WHEREAS, section 3.02 of Rev. Proc. 92-39 provides that the person required to remit the tax may consider the premium exempt if, prior to filing the return for the taxable period, such person has knowledge that the German insurer or reinsurer has in effect a closing agreement to be liable as a United States taxpayer for Federal excise tax due under section 4371 et seq. of the Code on premiums from policies reinsured with reinsurers that are not entitled to exemption from the excise tax under the Convention or any other convention and on premiums paid or accrued when the German insurer or reinsurer did not qualify under the Convention for exemption from the excise tax imposed by section 4371 et seq. of the Code;

WHEREAS, the German insurer or reinsurer represents that it is and will continue to be eligible for benefits under the Convention; and

WHEREAS, the German insurer or reinsurer (hereinafter referred to as "the Taxpayer") wishes to have its policies of insurance or reinsurance considered exempt from tax under the Convention; IT IS HEREBY DETERMINED AND AGREED THAT:

(1) Taxpayer shall, for purposes of this closing agreement, be liable as a United States Taxpayer for the Federal excise tax due under section 4371 et seq. of the Code on premiums from policies reinsured with reinsurers that are not entitled to exemption from the excise tax under the Convention or any other convention and from policies issued or outstanding when Taxpayer did not qualify under the Convention for exemption from the excise tax imposed by section 4371 et seq. of the Code.

(2)(a) Returns of Federal excise tax due under and pursuant to this closing agreement and section 4371 et seq. of the Code shall be made by Taxpayer, or by Taxpayer's authorized representative on Taxpayer's behalf, by filing Form 720, Quarterly Federal Excise Tax Return, for each return period covered by this closing agreement.

(b) If Taxpayer reinsures, in whole or in part, a policy of insurance or reinsurance with any person(s) not entitled to exemption from the excise tax under the Convention or any other convention or if Taxpayer issues or has outstanding a policy or policies when the Taxpayer did not qualify under the Convention for exemption from the excise tax imposed by section 4371 et seq. of the Code, the tax reportable on the return, Form 720, shall be computed on the basis of the percentage of such policy reinsured or on the basis of the premium accrued or received during the time period when Taxpayer did not qualify for exemption under the Convention. For purposes of the preceding sentence, Taxpayer may consider a reinsurer to be entitled to exemption from the excise tax under the Convention or another convention if the reinsurer is a party to a closing agreement with the Internal Revenue Service under this Convention or another convention, or the reinsurer provides evidence that it is a resident of the United States or of a country with which the United States has in effect a convention that waives the excise tax without an explicit "anti-conduit" clause.

(c) Forms 720 shall be filed with the Director, Internal Revenue Service Center, Philadelphia, Pennsylvania 19255, U.S.A.

(d) Taxpayer, or Taxpayer's authorized representative, shall make the required Federal tax deposits of the Federal excise tax in such manner and at such times as are prescribed by regulations and explained in the instructions for Form 720.

(3) Taxpayer agrees that, for purposes of determining its Federal excise tax liability pursuant to this closing agreement and for purposes of verifying Taxpayer's entitlement to benefits under the Convention, Taxpayer will maintain for a period of 6 years from the end of each taxable period to which this closing agreement applies accounts and records of items of insurance and reinsurance that will be made available upon written request by the Internal Revenue Service at the place mutually agreed upon by the Service and Taxpayer. Taxpayer will also maintain for 6 years and make available for inspection records to establish eligibility for Convention benefits. Taxpayer will be allowed 60 days, or other period of time determined as reasonable by the Assistant Commissioner (International), within which to make available its accounts and records.

(4) If it is determined that there is an underpayment in respect of any excise tax determined to be due pursuant to this closing agreement and section 4371 et seq. of the Code, the Internal Revenue Service shall issue a statement of notice and demand for the tax due plus any interest and applicable penalties. Notice of any underpayment shall be sent to the Taxpayer at the name and address shown on the Form 720, if a Form 720 was filed for the period for which an underpayment is determined by the Internal Revenue Service, or otherwise to the Taxpayer's registered address in Germany. Payment of all additional amounts due shall be made in accordance with the terms specified in the statement of notice and demand. Collection of such amounts not paid per notice and demand shall be in accordance with paragraph 5 hereof.

(5)(a) As security for payment of tax, taxpayer shall cause an irrevocable letter of credit to be issued by a United States bank that is a member of the Federal Reserve System, or by a United States branch or agency of a foreign bank that is on the National Association of Insurance Commissioners list of banks from which letters of credit may be accepted, in favor of the Internal Revenue Service in the amount of $_____ (amount to be agreed upon by Taxpayer and the Internal Revenue Service) or such amount as may from time to time be mutually agreed upon by Taxpayer and the Service. Such letter of credit must be in effect within 30 days of the date that the closing agreement is signed for the Commissioner of Internal Revenue.

(b) The Service may issue a statement of notice and demand with respect to:

(i) Any tax shown on a Form 720 (original, amended, or substitute for return) that is not paid with such return; or

(ii) Any proposed additional excise tax liability sustained by the Internal Revenue Service Regional Director of Appeals having jurisdiction over such matter, if the time for filing a protest of such proposed liability has expired, provided that the statement of notice and demand has been issued as provided in paragraph 4 hereof.

(c) If, after the conditions in paragraph 5(b) hereof have been met, the tax, interest, and any applicable penalties, are not paid in accordance with the terms of the statement of notice and demand, collection of such amounts will be made by resorting to such letter of credit, to the extent thereof, before any levy or proceeding in court for collection is instituted against Taxpayer.

(d) If such letter of credit is drawn upon, it must be reinstated to (amount as may have been agreed upon by the Service and Taxpayer) within 60 days after the date drawn upon.

(6)(a) Solely by reason of the execution by Taxpayer and the Commissioner of this closing agreement, any person otherwise required to remit the federal excise tax on foreign insurance or reinsurance premiums pursuant to section 46.4374-1(a) of the Excise Tax Regulations may consider premiums paid to Taxpayer after the effective date of this agreement as exempt under the Convention from the Federal excise tax.

(b) Taxpayer agrees that the Commissioner, or his or her authorized delegate, may disclose Taxpayer's name as an insurer or reinsurer that qualifies for exemption from the excise tax under the Convention by publication or otherwise.

(7)(a) This closing agreement shall include, as an attachment hereto, a statement from the local tax office ("Finanzamt") with which the insurer or reinsurer files its German tax returns, with an English translation, certifying that Taxpayer is a resident of Germany as defined in the Convention and a statement from Taxpayer, with an English translation, that Taxpayer is not disqualified from receiving benefits under the Convention by reason of Article 28 of the Convention. Taxpayer shall submit such information in its statement as will establish its entitlement to benefits under the Convention.

(b) The statement from the Finanzamt shall be effective for a period of 3 calendar years beginning with the year of receipt. Taxpayer agrees to renew the certificate of residency every three years, and its own certification of eligibility for benefits under the Convention every year, on or before the expiration date of the original certificate. Taxpayer agrees to provide an original and one copy of the recertification along with a photocopy of this closing agreement to:

          Internal Revenue Service

(8)(a) This closing agreement shall be effective ___________ [enter date of Taxpayer's request for a closing agreement]. This agreement shall thereafter continue in effect unless terminated as provided in subparagraph (b) of this paragraph.

(b) This agreement may be terminated by either Taxpayer or the Commissioner by giving the other written notice of the notifying party's intent to terminate. The decision to terminate is solely at the discretion of the party giving such notice. This agreement shall be terminated on the last day of the return period immediately following the return period within which the written notice of termination is given.

(c) Taxpayer hereby agrees to file a return, Form 720, marked "Final Return" for the taxable period within which this agreement terminates pursuant to paragraph (8)(b) hereof and to furnish a duplicate of such "Final Return" to:

          Internal Revenue Service

WHEREAS, the determinations set forth above are hereby agreed to by said taxpayer:

NOW THIS CLOSING AGREEMENT WITNESSETH, that the said taxpayer and said Commissioner of Internal Revenue hereby mutually agree that the determinations set forth shall be final and conclusive, subject, however, to reopening in the event of fraud, malfeasance, or misrepresentation of material fact, and provided that any change or modification of applicable statutes or tax conventions will render this agreement ineffective to the extent that it is dependent upon such statutes or tax conventions.

IN WITNESS WHEREOF, the above parties have subscribed their names to these presents, in triplicate.

Signed this (Date) day of (Month), (Year).

(b) If a foreign insurer or reinsurer seeks to qualify for treaty benefits under sections 3.08 and 3.09, the request must be accompanied by a list of names and addresses of the requester's shareholders (including, in the event that any direct shareholders are persons other than individuals, the names and addresses of those individuals who hold shares indirectly through such direct shareholders); information as to the percentage of outstanding shares of each class of stock owned by each shareholder; a statement, with respect to the calendar year immediately preceding the request, of the ratio which payments on liabilities to persons described in section 3.09 bore to the insurer or reinsurer's worldwide income (including investment income attributable to its insurance business, but excluding investment income not attributable to its insurance income). If the insurer or reinsurer was not in business during the calendar year immediately preceding the request, the statement as to the ratios of liabilities to worldwide income should be a representation as to what this ratio is expected to be during the insurer or reinsurer's first calendar year of business. Entities (either the requester or shareholder(s) of the requester) publicly traded on a recognized stock exchange in the United States or Germany need not provide the names and addresses of individual beneficial owners.

(c) If a foreign insurer or reinsurer seeks to qualify for treaty benefits under the alternative active trade or business tests in section 3.06 or 3.07, the request must be accompanied by the information required by these sections.

The request must be accompanied by three copies of the Closing Agreement with an original signature on each copy and an original and two copies of the Certificate of residency required by paragraph 7 of the Agreement.

SEC. 4. PERIODIC LISTING OF AGREEMENTS

The Service may periodically publish in the Internal Revenue Bulletin a list of foreign insurers or reinsurers that have entered into closing agreements under this revenue procedure and also those whose closing agreements are terminated so that the exemption no longer applies.

SEC. 5. OTHER TREATIES

These procedures may also be used by insurers or reinsurers claiming benefits under the United States Conventions with Finland, India, and Spain, and under any other United States Convention that has similar limitations on benefits and excise tax exemption provisions which enter into force after the effective date of this revenue procedure. However, the residency certificate required by sections 3.01 and 3.12(c) and paragraph (7) of the Closing Agreement should be provided by the appropriate office of the government of the respective treaty country.

SEC. 6. EFFECTIVE DATE

This revenue procedure is effective May 18, 1992, the date of its publication in the Internal Revenue Bulletin.

SEC. 7. EFFECT ON OTHER DOCUMENTS

Paragraph (5)(a) of the closing agreement in Rev. Proc. 84-82, 1984-2 C.B. 779, and paragraph (5)(a) of the closing agreement in Rev. Proc. 87-13, 1987-1 C.B. 596, are modified to state that in addition to letters of credit issued by a United States bank that is a member of the Federal Reserve System, a taxpayer may submit a letter of credit issued by a United States branch or agency of a foreign bank that is on the National Association of Insurance Commissioners list of banks from which letters of credit may be accepted.

SEC. 8. DRAFTING INFORMATION

The principal author of this revenue procedure is Ed Williams of the Office of the Associate Chief Counsel (International). For further information on this procedure, call Mr. Williams at 202-874- 1490 (not a toll-free call), or write to CC:INTL:Br1, Room 3319, 950 L'Enfant Plaza, Washington, D.C. 20024.