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IRS loses appeal in offshore reinsurance tax case

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Validus Reinsurance Ltd. has won a second court victory in its attempts to have the taxation of a type of offshore reinsurance ended.

The U.S. Court of Appeals, District of Columbia Circuit decided May 26 to grant the company's request for a summary judgment dismissing the appeal of the Internal Revenue Service to the court's initial ruling which favored Validus.

In the case, Validus, which is based in Bermuda, bought retrocessional coverage – which is effectively the reinsurance of reinsurance – and sought the return of U.S. excise tax it paid on nine retrocessional policies that it bought from non-U.S. retrocessionaires. When the IRS failed to provide the refunds, Validus sued the agency.

The original case was decided in February 2014.

“We affirm the grant of summary judgment, albeit on narrower grounds, to Validus on its refund claims,” wrote the appeals court in its decision to dismiss the IRS appeal.

The IRS had previously asserted the jurisdiction to tax successive insurance retrocessions, where reinsurers purchase coverage from other reinsurers, even when they involved non-U.S companies, if any part of the initial ceding involved a U.S. entity.

“Neither the text, context, purpose, nor legislative history provide a clear indication of congressional intent to rebut the presumption against such expansive extraterritorial application,” said the appeals court in its decision.

“The decision confirms the industry's view that the IRS 'cascading tax' theory was a tremendous overreach,” said Tracy Williams, a partner at Sidley Austin L.L.P. who represented Pembroke, Bermuda-based Validus and is co-head of Sidley's insurance tax practice in Chicago.