Federal Excise Tax on Foreign Insurance Premiums (FET)

When a U.S. person or business pays insurance or reinsurance premiums to a foreign insurer or reinsurer that is not admitted in the United States — and that foreign insurer has not elected to be treated as a U.S. insurer — a federal excise tax (FET) applies. Codified at 26 U.S.C. §§ 4371–4374 (Chapter 34 of the IRC), the FET is a percentage of the premium paid: 4% on casualty insurance premiums, 4% on reinsurance premiums, and 1% on life insurance and annuity premiums. The tax exists to level the playing field between domestic insurers (who pay U.S. income tax) and foreign insurers (who may not). See insurance company taxation for how domestic insurers are taxed generally, and international tax — GILTI and FDII for the broader framework governing multinational U.S. tax policy. It applies to premiums paid by U.S. corporations for their overseas operations, captive insurance arrangements, and surplus lines policies from the London market and other foreign markets. Tax treaties may exempt premiums covered by bilateral treaty partners, and foreign insurers can elect under § 953(d) to be treated as a domestic corporation (avoiding FET but subjecting themselves to U.S. income tax).

Current Law (2026)

Legal Authority

• 26 U.S.C. § 4371 — Imposes the FET: 4 cents on each dollar of premium paid on policies of casualty insurance or indemnity bonds, and 4 cents on each dollar paid for reinsurance; 1 cent on each dollar paid for life insurance, sickness and accident policies, and annuity contracts issued by foreign insurers on U.S. risks or U.S. residents
• 26 U.S.C. § 4372 — Definitions: "foreign insurer or reinsurer" means an insurer or reinsurer that is a foreign corporation; "United States" includes all 50 states and DC; "policy of insurance" covers all forms of insurance; excludes policies issued by foreign branches of domestic U.S. insurance corporations
• 26 U.S.C. § 4373 — Exemptions: premiums paid on policies of insurance or reinsurance issued by a foreign insurer or reinsurer that has made an election under § 953(d) (to be treated as a domestic corporation for tax purposes) are not subject to FET; also exempts premiums covered by income tax treaty provisions eliminating or reducing the tax
• 26 U.S.C. § 4374 — Payment of tax: the insured (or the broker or agent placing coverage) is liable for collecting and paying the FET; returns are filed on Form 720 (Quarterly Federal Excise Tax Return) with IRS

How It Works

The legal obligation to pay FET falls on the insured U.S. person, but in practice the U.S. insurance broker or surplus lines agent placing coverage with a foreign insurer typically collects FET from the insured and remits it on Form 720. When coverage is placed directly with a foreign insurer (no U.S. intermediary), the insured must file and pay FET directly. Two conditions trigger FET: (1) a foreign insurer or reinsurer that is neither admitted in the U.S. nor has made a § 953(d) election is the carrier, and (2) the risk is U.S.-located or the insured is a U.S. person. The 4% reinsurance rate applies when U.S. domestic insurers cede risks to foreign reinsurers — a significant exposure for companies accessing the London market (Lloyd's of London) or the Bermuda reinsurance market, which expanded substantially after Hurricane Katrina.

Tax treaties with major insurance markets — the United Kingdom, Germany, France, Switzerland, and others — contain provisions exempting premiums from FET, but whether an exemption applies depends on the specific treaty language and whether the foreign insurer qualifies as a treaty resident. Foreign insurance companies can elect under § 953(d) to be treated as a domestic corporation for U.S. tax purposes, subjecting themselves to U.S. income tax on worldwide income but exempting premiums they receive from FET — many large foreign reinsurers with significant U.S. business make this election, which is irrevocable without IRS consent. A significant compliance trap arises with offshore captive insurance arrangements: companies that set up wholly-owned captive subsidiaries in low-tax jurisdictions (Cayman Islands, Bermuda, Vermont) to insure parent company risks must account for FET on premiums paid to a foreign captive, which can substantially erode the arrangement's tax efficiency.

How It Affects You

If you run a multinational corporation: Any premium you pay to a foreign insurer for U.S. risks — through a London market program, offshore captive, or foreign parent company policy — may be subject to FET. Review your global insurance program annually with your tax advisors to identify FET exposure. The 4% rate can be material on large casualty premiums. Check whether your foreign carriers have made § 953(d) elections (they should tell you) or whether applicable treaties exempt the coverage.

If you use surplus lines insurance: Surplus lines policies placed through non-admitted foreign insurers (commonly Lloyd's syndicates) are typically subject to FET. Your U.S. surplus lines broker should be calculating and paying FET as part of the placement. Confirm this explicitly — failure to pay FET is the insured's ultimate legal liability, not just the broker's.

If you have a captive insurance arrangement: If your captive is domiciled offshore (Cayman, Bermuda, etc.) rather than in a U.S. captive domicile (Vermont, Delaware, Hawaii), premiums paid to the captive are subject to FET. This is frequently overlooked in captive feasibility analyses. Domestic captives (§ 831(b) small insurance companies) avoid FET. The choice of captive domicile has direct FET consequences.

If you're a reinsurance professional: FET on reinsurance premiums is a standard cost of accessing non-U.S. reinsurance markets. London market and Bermuda market reinsurers that have not made § 953(d) elections collect FET (or the U.S. ceding company pays it directly). The treaty network, particularly the U.S.-UK treaty's insurance provisions, is frequently analyzed when placing catastrophe reinsurance programs.

State Variations

FET is a federal tax — states do not impose their own version. However, states do impose surplus lines premium taxes (typically 3–5%) on non-admitted insurance placed with foreign or domestic non-admitted insurers. These state surplus lines taxes and federal FET stack on top of each other, significantly increasing the effective cost of placing coverage with non-admitted foreign insurers. Surplus lines premium taxes are reported to states through the Surplus Lines Stamping Offices maintained by each state.

Pending Legislation

No major pending FET legislation as of April 2026. The ongoing OECD Pillar Two global minimum tax (15% minimum corporate rate) creates indirect pressure on § 953(d) election economics, as the tax efficiency of foreign insurer arrangements changes. Some multinational insurers are revisiting their § 953(d) elections in light of Pillar Two implementation.

Recent Developments

• IRS micro-captive enforcement intensified and reached Tax Court (2021–2025): The IRS's campaign against abusive offshore captive insurance arrangements — those that pay grossly inflated premiums to related-party captives with little economic substance — reached a significant stage when the Tax Court and multiple circuit courts upheld the IRS's disallowance of deductions for abusive micro-captive structures in several litigated cases (including Reserve Mechanical Corp. and related decisions). For offshore captives, FET exposure stacks on top of the income tax disallowance risk. The practical result: companies considering offshore captive arrangements face a higher bar than ever for demonstrating economic substance, genuine risk transfer, and arm's-length premium pricing.
• Hurricane seasons 2022–2025 increased offshore reinsurance demand and FET volume: Hurricane Ian (2022), Hurricane Helene (September 2024), and Hurricane Milton (October 2024) drove record catastrophe losses in Florida and the Southeast. Domestic insurers responding to these losses sought additional reinsurance capacity from the London market and Bermuda sidecar vehicles, increasing the volume of FET-subject reinsurance premiums. Bermuda's reinsurance market grew substantially during 2022–2024 as capital sought catastrophe exposure through ILS structures, driving new § 4371 compliance questions for ceding companies.
• OECD Pillar Two changed § 953(d) election calculus: The OECD Pillar Two global minimum tax (15% effective minimum rate for multinationals with €750M+ revenues), implemented in 40+ countries starting 2024, significantly altered the economics of offshore insurer structures. Under Pillar Two, a foreign insurer in Bermuda (which has its own 15% corporate tax) may face top-up taxes from the parent company's jurisdiction. The previous advantage of being offshore — paying less than 15% effective tax — is largely eliminated for larger structures. Some major foreign reinsurers and captive managers have begun re-evaluating whether § 953(d) elections (which subject them to full U.S. income tax but eliminate FET) are now more efficient than maintaining offshore structures subject to both Pillar Two top-up taxes and FET.
• IRS FET enforcement on Insurance-Linked Securities (ILS) clarified: Insurance-Linked Securities — catastrophe bonds and collateralized reinsurance arrangements where capital market investors take on insurance risk — have grown to a $100+ billion market. IRS guidance has clarified that FET applies to premium-like payments made to qualifying ILS structures that are not admitted U.S. insurers. The offshore nature of most ILS vehicles (Cayman Islands special purpose vehicles are the standard structure) means that ceding companies must analyze FET exposure on each transaction. Some ILS structures incorporate § 953(d) elections or treaty-country registrations specifically to eliminate FET as a transaction cost.