The IRS has privately ruled that a foreign life insurance subsidiary can use its foreign annual statement liabilities calculated under a Solvency II-based methodology to determine its foreign statement reserves for federal tax purposes. (PLR 202642003, 10/16/2026)
Regulatory changes prompt foreign insurer to seek updated ruling
The taxpayer is a domestic life insurance company and the common parent of an affiliated group. Through entities treated as disregarded for U.S. federal income tax purposes, the taxpayer owns an equity interest in a foreign partnership that wholly owns a foreign insurance company. The foreign insurer is incorporated in Country A and operates as a controlled foreign corporation (CFC). The CFC’s business consists of underwriting annuity contracts for pension plans in Country A.
The foreign insurer qualifies as a qualifying insurance company (QIC) under IRC § 953(e)(3) because it is regulated in its home country, derives more than 50% of its aggregate net written premiums from home country risks, and is engaged in an active insurance business. Its annuity contracts are treated as exempt contracts.
Previously, the IRS issued a private letter ruling to the taxpayer in 2016 approving a reserve methodology for the CFC under IRC § 954(i)(4)(B)(ii). However, Country A subsequently modified its insurance regulatory and financial reporting regimes, changing how insurers must compute reserves. Because of these regulatory shifts, the taxpayer requested an updated ruling to confirm that the CFC’s new reserve computation method serves as an appropriate means of measuring income.
Subpart F rules for qualifying insurance company reserves
U.S. shareholders of a CFC must generally include their pro rata share of the CFC’s subpart F income in their gross income. Subpart F income includes insurance income under IRC § 953 and foreign base company income under IRC § 954. For a QIC, reserves for insurance or annuity contracts must be determined under the rules of IRC § 954(i). These rules also apply when determining tested income and tested loss for Global Intangible Low-Taxed Income (GILTI) purposes under Reg. § 1.951A-2(c)(2).
Under IRC § 954(i)(4)(B)(i), a QIC’s reserve for a life insurance or annuity contract is generally the greater of the net surrender value of the contract or the reserve determined under subchapter L rules, subject to certain adjustments. However, IRC § 954(i)(4)(B)(ii) permits a taxpayer to use the foreign statement reserve for the contract if the IRS determines that the factors used to calculate that reserve provide an appropriate means of measuring income. This provision was originally enacted under Section 614 of the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147).
Solvency II liabilities are subject to specific tax adjustments
To comply with Country A’s regulatory standards, the CFC calculates its insurance contract liabilities using a Solvency II-based methodology. These liabilities include “best estimate liabilities,” which are prospective actuarial valuations of discounted projected net cash flows. The CFC reports these liabilities on its annual statement submitted to its foreign insurance regulator.
The IRS ruled that the CFC’s annual statement filed with its foreign regulator qualifies as its foreign statement under IRC § 954(i)(4). Furthermore, a senior technical reviewer in the IRS Office of Associate Chief Counsel (International), ruled that the Solvency II-based best estimate liabilities provide an appropriate means of measuring income under IRC § 954(i)(4)(B)(ii) for tax years beginning after Date A, provided the taxpayer makes several specific adjustments.
First, the taxpayer must exclude any portion of the best estimate liabilities representing catastrophe, deficiency, equalization, or similar reserves. Second, the taxpayer must exclude asset adequacy reserves. Third, the taxpayer must adjust the figures to reflect the effect of policies treated as reinsured for U.S. federal income tax purposes. Finally, the taxpayer must subtract certain other factors, including maintenance reserves, third-party administrative expenses, and investment management expenses.
For more information on the use of foreign statement reserves by qualifying insurance companies, see Checkpoint’s Federal Tax Coordinator 2d ¶ O-2594.
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