On February 5, 2014, the U.S. District Court in Washington, D.C. issued the much anticipated opinion in Validus, holding that the so-called “cascading” federal excise tax (FET) of 1 percent of premiums paid in connection with reinsurance covering US risks does not apply to retrocession agreements between a non-U.S. reinsurer and a non-U.S. retrocessionaire. The court’s reasoning suggests that reinsurance agreements between a non-U.S. insurer and a non-U.S. reinsurer that cover U.S. risks are subject to the cascading FET, but the opinion does not specifically address this issue.
This is a significant and generally helpful decision for non-U.S. reinsurers involved in retrocession transactions. In light of the decision, non-US reinsurers should consider evaluating the FET they have paid in recent years to determine whether a refund claim is appropriate. Additionally, non-U.S. reinsurers should consider the impact of Validus on future transactions. It is uncertain whether the Internal Revenue Service will appeal the decision. Such an appeal, while pending, could impact the considerations described above.
For prior coverage, “Cascading” federal excise tax challenged in recent U.S. District Court case, click here.