Frequently Asked Questions
Who is eligible for the Contiguous Country Branch Income Exclusion?
Must be a domestic mutual life insurance company with a branch in Canada or Mexico that insures residents of that country and maintains separate accounting for that branch.
How does the Contiguous Country Branch Income Exclusion work?
Domestic mutual life insurance companies can elect to exclude income, deductions, and assets of a branch operating in a contiguous country (Canada or Mexico) from their U.S. taxable income.
What law authorizes the Contiguous Country Branch Income Exclusion?
The Contiguous Country Branch Income Exclusion is authorized under IRC §814 of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §814
Source: Internal Revenue Code, Title 26, United States Code
§ 814. Contiguous country branches of domestic life insurance companies(a) Exclusion of itemsIn the case of a domestic mutual insurance company which—(1) is a life insurance company,
(2) has a contiguous country life insurance branch, and
(3) makes the election provided by subsection (g) with respect to such branch,
there shall be excluded from each item involved in the determination of life insurance company taxable income the items separately accounted for in accordance with subsection (c).
(b) Contiguous country life insurance branchFor purposes of this section, the term contiguous country life insurance branch means a branch which—(1) issues insurance contracts insuring risks in connection with the lives or health of residents of a country which is contiguous to the United States,
(2) has its principal place of business in such contiguous country, and
(3) would constitute a mutual life insurance company if such branch were a separate domestic insurance company.
For purposes of this section, the term “insurance contract” means any life, health, accident, or annuity contract or reinsurance contract or any contract relating thereto.
(c) Separate accounting requiredAny taxpayer which makes the election provided by subsection (g) shall establish and maintain a separate account for the various income, exclusion, deduction, asset, reserve, liability, and surplus items properly attributable to the contracts described in subsection (b). Such separate accounting shall be made—(1) in accordance with the method regularly employed by such company, if such method clearly reflects income derived from, and the other items attributable to, the contracts described in subsection (b), and
(2) in all other cases, in accordance with regulations prescribed by the Secretary.
(d) Recognition of gain on assets in branch accountIf the aggregate fair market value of all the invested assets and tangible property which are separately accounted for by the domestic life insurance company in the branch account established pursuant to subsection (c) exceeds the aggregate adjusted basis of such assets for purposes of determining gain, then the domestic life insurance company shall be treated as having sold all such assets on the first day of the first taxable year for which the election is in effect at their fair market value on such first day. Notwithstanding any other provision of this chapter, the net gain shall be recognized to the domestic life insurance company on the deemed sale described in the preceding sentence.
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