The good news is that, under the recently released Foreign Account Tax Compliance Act (FATCA) regulations, most non-U.S. property and casualty (P&C) insurance and reinsurance companies will not be considered foreign financial institutions (FFIs) under section 1471 of the Internal Revenue Code and therefore will not be subject to the complex reporting and withholding regime imposed on FFIs. As non-FFIs, however, these entities will constitute “non-financial foreign entities” (NFFEs) and, absent qualification for one or more exceptions set forth in the regulations, will be subject to the reporting and withholding rules under section 1472 of the Code.

Some companies will be exempt from the NFFE rules because their stock is regularly traded on an established securities market, or they are a member of the same expanded affiliate d group (EAG) as a corporation whose stock is regularly traded on an established securities market. However, non-regularly traded NFFE insurers and reinsurers will find it difficult to comply with the other exceptions to the NFFE rules, including those for active NFFEs. The difficulty arises because of regulation section 1.1472 - 1(c)(iv), which requires that, for an insurance company to be considered active, less than 50% of its gross income must be passive income and less than 50%of its assets must be assets that produce or are held to produce passive income. Moreover, in defining “passive income,” the regulations treat income derived by an insurance company in connection with its reserves as passive income. Based on these regulations, many non-regularly traded NFFE insurers and reinsurers will fail to satisfy the mathematical test to be considered “active NFFEs,” notwithstanding that many of these entities will be engaged in the active conduct of an insurance or reinsurance business.