Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 77-62

1977-1 C.B. 414

Section 882

IRS Headnote

France; insurance companies; "reinsurance premiums"; investment income. The phrase "reinsurance premiums", as used in Article 4 of the Exchange of Notes between the U.S. and France dated July 28, 1967, includes investment income derived in connection with the conduct of a reinsurance business in one of the Contracting States by an insurance company that is a resident of the other Contracting State and is exempt from tax in the former Contracting State, whether or not the insurance company maintains a permanent establishment therein.

Full Text

Rev. Rul. 77-62

Advice has been requested concerning the interpretation of Article 4 of the Exchange of Notes between the United States and France (the Note) dated July 28, 1967, [1968] 19 U.S.T. 5366, T.I.A.S. No. 6518, which answers certain questions that arose with respect to the United States-France Income Tax Convention (the Convention), 1968-2 C.B. 691.

Article 4 of the Note is as follows:

It is understood that when an insurance company of one of the Contracting States has a permanent establishment in the other Contracting State the reinsurance premiums received shall be taken into account for the determination of taxable profits only in the Contracting State of which the company is a resident.

The specific question is whether the phrase "reinsurance premiums" includes investment income derived from the conduct of a reinsurance business in one of the Contracting States.

Article 4(5) and (7) of the Convention provides that an insurance company of one Contracting State receiving premiums from, or insuring risks in, the other Contracting State will not be regarded as having a permanent establishment in that other Contracting State unless it receives those premiums or insures those risks through a permanent establishment located therein.

Under the provisions of Article 4(5) and (7) of the Convention and Paragraph 4 of the Note, it was intended that any income derived from activities of an insurance company of one Contracting State in reinsuring risks in the other Contracting State is to be exempt from tax in that latter Contracting State, whether or not the insurance company maintains a permanent establishment therein. See Hearing on Executive N (Tax Convention with France) before Senate Committee on Foreign Relations, 90th Cong., 1st Sess. 51-52 (1968).

Under the authority granted by Article 25(2) of the Convention the Competent Authority of the Internal Revenue Service and the French Ministry of Economy and Finance, Tax Administration Legal Department, have agreed pursuant to an exchange of letters to interpret the phrase "reinsurance premiums" to include investment income derived in connection with the conduct of a reinsurance business in one of the Contracting States by an insurance company that is a resident of the other Contracting State.

Accordingly, in applying Paragraph 4 of the Note the term "reinsurance premiums" shall be viewed as including investment income derived in connection with the conduct of a reinsurance business in one of the Contracting States by an insurance company that is a resident of the other Contracting State. Furthermore, all expenses, losses, and other deductions definitely allocable to the reinsurance contracts or to the investment income deemed to be included within the term reinsurance premiums shall be excluded in computing the income or profits taxable in a Contracting State of an insurance company that is a resident of the other Contracting State. Where an expense, loss, or other deduction cannot definitely be allocated to the reinsurance contract or to investment income deemed to be included within reinsurance premiums, a ratable portion of such expense, loss, or other deduction shall also be excluded in computing the income or profit taxable in a Contracting State of an insurance company that is a resident of the other Contracting State.