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Validus Court Holds FET Not Applicable to Foreign Reinsurance

American Courtroom Interior
May 27, 2015

By M. Kristan Rizzolo, P. Bruce Wright, and Saren Goldner
Sutherland Asbill & Brennan LLP

On May 26, 2015, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the decision of the U.S. District Court for the District of Columbia in Validus Reinsurance, Ltd. v. United States. This is the first case to involve a challenge to Rev. Rul. 2008-15, in which the Internal Revenue Service (IRS) set forth its position on the “cascading” application of the federal excise tax (FET) imposed in premiums paid to foreign companies in connection with policies covering U.S. risks.

Validus Reinsurance, Ltd. (Validus), which does not engage in business in the United States, had challenged the application of the FET to retrocession transactions it entered into outside the United States with foreign insurance companies. In reaching its decision, the court of appeals did not rely on the plain language reasoning previously embraced by the district court but instead relied on the presumption against the extraterritorial application of a statute without clear congressional intent.

In the court of appeals, both the government and Validus argued that the plain language of the statute supported their respective positions. The court of appeals rejected both arguments and concluded that both interpretations are plausible so the statute is ambiguous. According to the court of appeals, that ambiguity “is resolved by the presumption against extraterritoriality.”

In an opinion that incorporated much of the analysis set forth in the brief filed by the amici curiae, the International Underwriters Association of London and the London & International Brokers Association, the court of appeals analyzed the language of the statute and its evolution, as well as the legislative history of the FET. It then concluded that there was no clear intent by Congress for the FET to apply to wholly foreign transactions. Accordingly, the court of appeals held the presumption against extraterritorial application applies to the FET.

Ms. Rizzolo and Mr. Wright are partners and Ms. Goldner is counsel in the tax department of Sutherland Asbill & Brennan LLP. Mr. Wright and Ms. Goldner are located in New York and Ms. Rizzolo in Washington, D.C.

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