MBlogoThe U.S. Court of Appeals for the DC Circuit has affirmed that the federal excise tax (FET) does not apply on a “cascading” basis each time a US risk is retroceded from one foreign reinsurer to another, according to a report by Mayer Brown. The ruling applies only to foreign-to-foreign retrocessions, not to U.S.-foreign retrocessions.

The appeals court upheld a lower court decision granting reinsurance company Validus Re a refund of FET paid on retrocessions of US-source risks to non-US retrocessionnaires.

The Internal Revenue Service announced in 2008 that the FET applied each time insurance of a U.S. risk was shifted by reinsurance or retrocession. The District Court found in favor of Validus, stating that section 4371(3) if the IRS code applies to “reinsurance,” and that the transactions on which Validus paid the FET were “retrocessions.”

In affirming the judgment for Validus, the appeals court found the language of the IRS section “ambiguous with regard to wholly foreign retrocessions.”