II 

112TH CONGRESS 

1ST SESSION S. 1693 

To amend the Internal Revenue Code of 1986 to prevent the avoidance 

of tax by insurance companies through reinsurance with non-taxed affiliates. 

IN THE SENATE OF THE UNITED STATES 

OCTOBER 12, 2011 

Mr. MENENDEZ introduced the following bill; which was read twice and 

referred to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to prevent 

the avoidance of tax by insurance companies through 

reinsurance with non-taxed affiliates. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. PREVENTION OF AVOIDANCE OF TAX THROUGH 

4 REINSURANCE WITH NON-TAXED AFFILIATES. 

5 (a) IN GENERAL.—Part III of subchapter L of chap6 ter 1 of the Internal Revenue Code of 1986 is amended 

7 by adding at the end the following new section: 

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1 ‘‘SEC. 849. SPECIAL RULES FOR REINSURANCE OF NON2 LIFE CONTRACTS WITH NON-TAXED AFFILI3 ATES. 

4 ‘‘(a) IN GENERAL.—The taxable income under sec5 tion 831(a) or the life insurance company taxable income 

6 under section 801(b) (as the case may be) of an insurance 

7 company shall be determined by not taking into account— 

8 ‘‘(1) any non-taxed reinsurance premium, 

9 ‘‘(2) any additional amount paid by such insur10 ance company with respect to the reinsurance for 

11 which such non-taxed reinsurance premium is paid, 

12 to the extent such additional amount is properly al13 locable to such non-taxed reinsurance premium, and 

14 ‘‘(3) any return premium, ceding commission, 

15 reinsurance recovered, or other amount received by 

16 such insurance company with respect to the reinsur17 ance for which such non-taxed reinsurance premium 

18 is paid, to the extent such return premium, ceding 

19 commission, reinsurance recovered, or other amount 

20 is properly allocable to such non-taxed reinsurance 

21 premium. 

22 ‘‘(b) NON-TAXED REINSURANCE PREMIUMS.—For 

23 purposes of this section— 

24 ‘‘(1) IN GENERAL.—The term ‘non-taxed rein25 surance premium’ means any reinsurance premium 

26 paid directly or indirectly to an affiliated corporation 

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1 with respect to reinsurance of risks (other than ex2 cepted risks), to the extent that the income attrib3 utable to the premium is not subject to tax under 

4 this subtitle (either as the income of the affiliated 

5 corporation or as amounts included in gross income 

6 by a United States shareholder under section 951). 

7 ‘‘(2) EXCEPTED RISKS.—The term ‘excepted 

8 risks’ means any risk with respect to which reserves 

9 described in section 816(b)(1) are established. 

10 ‘‘(c) AFFILIATED CORPORATIONS.—For purposes of 

11 this section, a corporation shall be treated as affiliated 

12 with an insurance company if both corporations would be 

13 members of the same controlled group of corporations (as 

14 defined in section 1563(a)) if section 1563 were applied— 

15 ‘‘(1) by substituting ‘at least 50 percent’ for ‘at 

16 least 80 percent’ each place it appears in subsection 

17 (a)(1), and 

18 ‘‘(2) without regard to subsections (a)(4), 

19 (b)(2)(C), (b)(2)(D), and (e)(3)(C). 

20 ‘‘(d) ELECTION TO TREAT REINSURANCE INCOME AS

21 EFFECTIVELY CONNECTED.— 

22 ‘‘(1) IN GENERAL.—A specified affiliated cor23 poration may elect for any taxable year to treat 

24 specified reinsurance income as— 

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1 ‘‘(A) income effectively connected with the 

2 conduct of a trade or business in the United 

3 States, and 

4 ‘‘(B) for purposes of any treaty between 

5 the United States and any foreign country, in6 come attributable to a permanent establishment 

7 in the United States. 

8 ‘‘(2) EFFECT OF ELECTION.—In the case of 

9 any specified reinsurance income with respect to 

10 which the election under this subsection applies— 

11 ‘‘(A) DEDUCTION ALLOWED FOR REINSUR12 ANCE PREMIUMS.—For exemption from sub13 section (a), see definition of non-taxed reinsur14 ance premiums in subsection (b). 

15 ‘‘(B) EXCEPTION FROM EXCISE TAX.—The 

16 tax imposed by section 4371 shall not apply 

17 with respect to any income treated as effectively 

18 connected with the conduct of a trade or busi19 ness in the United States under paragraph (1). 

20 ‘‘(C) TAXATION UNDER THIS SUB21 CHAPTER.—Such income shall be subject to tax 

22 under this subchapter to the same extent and 

23 in the same manner as if such income were the 

24 income of a domestic insurance company. 

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1 ‘‘(D) COORDINATION WITH FOREIGN TAX

2 CREDIT PROVISIONS.—For purposes of subpart 

3 A of part III of subchapter N and sections 78 

4 and 960— 

5 ‘‘(i) such specified reinsurance income 

6 shall be treated as derived from sources 

7 without the United States, and 

8 ‘‘(ii) subsections (a), (b), and (c) of 

9 section 904 and sections 902, 907, and 

10 960 shall be applied separately with re11 spect to each item of such income. 

12 The Secretary may issue regulations or other 

13 guidance which provide that related items of 

14 specified reinsurance income may be aggregated 

15 for purposes of applying clause (ii). 

16 ‘‘(3) SPECIFIED AFFILIATED CORPORATION.— 

17 For purposes of this subsection, the term ‘specified 

18 affiliated corporation’ means any affiliated corpora19 tion which is a foreign corporation and which meets 

20 such requirements as the Secretary shall prescribe to 

21 ensure that tax on the specified reinsurance income 

22 of such corporation is properly determined and paid. 

23 ‘‘(4) SPECIFIED REINSURANCE INCOME.—For 

24 purposes of this paragraph, the term ‘specified rein25 surance income’ means all income of a specified afmstockstill on DSK4VPTVN1PROD with BILLS

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1 filiated corporation which is attributable to reinsur2 ance with respect to which subsection (a) would (but 

3 for the election under this subsection) apply. 

4 ‘‘(5) RULES RELATED TO ELECTION.—Any 

5 election under paragraph (1) shall— 

6 ‘‘(A) be made at such time and in such 

7 form and manner as the Secretary may provide, 

8 and 

9 ‘‘(B) apply for the taxable year for which 

10 made and all subsequent taxable years unless 

11 revoked with the consent of the Secretary. 

12 ‘‘(e) REGULATIONS.—The Secretary shall prescribe 

13 such regulations or other guidance as may be appropriate 

14 to carry out, or to prevent the avoidance of the purposes 

15 of, this section, including regulations or other guidance 

16 which provide for the application of this section to alter17 native reinsurance transactions, fronting transactions, 

18 conduit and reciprocal transactions, and any economically 

19 equivalent transactions.’’. 

20 (b) CLERICAL AMENDMENT.—The table of sections 

21 for part III of subchapter L of chapter 1 of such Code 

22 is amended by adding at the end the following new item: 

‘‘Sec. 849. Special rules for reinsurance of non-life contracts with non-taxed affiliates.’’. 

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1 (c) EFFECTIVE DATE.—The amendment made by 

2 this section shall apply to taxable years beginning after 

3 December 31, 2011. 

Æ 

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