Must a non-licensed captive insurer that pays the Texas insurance premium tax also pay Texas franchise tax, or is it exempt?

Plain-English summary

After an audit, the Comptroller assessed a non-licensed Vermont captive insurer (which insured affiliated companies) the Texas insurance premium receipts tax under Insurance Code Article 1.14-1, Section 11. The company had also paid franchise tax, and on redetermination (Hearing No. 38,565) argued it should not have to pay both.

• The premium tax stood. The company was doing the business of insurance in Texas and had no license and no certificate of authority, so it was subject to the premium tax; the placement provisions did not exempt it from any applicable premium tax.
• The insurance-code franchise exemptions didn't fit. Articles 4.06, 4.10 (Sec. 14), 4.11 (Sec. 9), and 9.59 each exempt only licensed insurers subject to the Chapter 4 or title gross-premium taxes - they do not exempt non-licensed insurers.
• But the Tax Code exemption applied. Tax Code Sec. 171.052 exempts a corporation that is an insurance, surety, guaranty, or fidelity company now required to pay or that pays an annual tax measured by gross receipts. Read with Rule 3.541(c)(1), this exempts such insurers from franchise tax.
• Decision. The franchise-tax exemption is recognized for this company, and the franchise-tax payments already made are allowed as a credit against the premium-tax assessment.

Currency note: This 2000 redetermination applies the pre-2008 franchise tax (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928), and the Insurance Code articles cited have since been recodified. Verify the current, renumbered provisions.

What this means for you

Insurers, including captives and surplus-lines writers

The rule against double taxation here is important: if you're an insurance (or surety/guaranty/fidelity) company that pays a Texas gross-receipts/premium tax, Sec. 171.052 exempts you from the franchise tax - even if you're non-licensed and the licensed-insurer exemptions in the Insurance Code don't reach you. If you paid both, the franchise payments could be credited against the premium assessment.

Tax professionals

The reasoning distinguishes the licensed-insurer Insurance Code exemptions (Arts. 4.06/4.10/4.11/9.59) from the broader Tax Code Sec. 171.052 / Rule 3.541(c)(1) exemption keyed to paying a gross-receipts tax. The remedy - franchise payments credited against the premium assessment - avoids double tax. Note the articles are pre-recodification and the franchise tax is now the margin tax; verify renumbered citations and current margin-tax treatment of insurers.

Common questions

Q: Does a non-licensed captive insurer that pays Texas premium tax also owe franchise tax?
A: No. Under Tax Code Sec. 171.052 and Rule 3.541(c)(1), an insurance company that pays an annual gross-receipts (premium) tax is exempt from the franchise tax.

Q: Why didn't the Insurance Code exemptions (Articles 4.06, 4.10, 4.11, 9.59) apply?
A: Those exempt only licensed insurers subject to the Chapter 4 or title gross-premium taxes; they do not exempt non-licensed insurers.

Q: What happened to the franchise tax the company already paid?
A: It was allowed as a credit against the premium-tax assessment.

Citations and references

Statutes and rule:

• Texas Tax Code Sec. 171.052 - franchise-tax exemption for an insurance, surety, guaranty, or fidelity company required to pay or that pays an annual gross-receipts tax
• 34 Tex. Admin. Code Sec. 3.541(c)(1) (Franchise Tax Rule 3.541) - insurers subject to the premium tax are exempt from franchise tax; no other insurer franchise exemption
• Tex. Ins. Code art. 1.14-1, Sec. 11 - premium receipts tax (as cited; since recodified)
• Tex. Ins. Code arts. 4.06, 4.10 Sec. 14, 4.11 Sec. 9, 9.59 - licensed-insurer occupation/premium-tax exemptions (as cited; since recodified)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200005297L

Original ruling text

May 12, 2000

Issue: **
Hearing Number: 38,565
Franchise Tax Exemption Due to Payment of Insurance Premium Taxes Under Article
1.14-1, Section 11, Texas Insurance Code

January 1, 1993 through December 31, 1995

Dear **:

As a result of an audit for tax years 1992 through 1997, this agency assessed
**, (INSURANCE COMPANY) an insurance premium tax under Article
1.14-1, Section 11, Texas Insurance Code. In **'s letter of
December 23, 1998, the company requested a redetermination hearing of this
assessment and the company was notified on January 11, 1999, of our receipt of
the request.

Facts:

INSURANCE COMPANY, a Vermont corporation, is a wholly owned subsidiary of
CORPORATION and a captive insurance company that provides insurance to
affiliated companies. The company was found to be issuing policies in Texas
whereby one or more activities, defined under the Texas Insurance Code as doing
the business of insurance, were being performed in this state. Under Article
1.14-1, Section 2, such acts include making or proposing to make an insurance
contract, the taking or receiving of any application for insurance, the
receiving or collecting of any premium or other consideration for insurance,
and the issuing or delivering of contracts of insurance to residents of this
state. Under Section 2 (b)(7), the insurance code states that the provisions
of this section do not apply to: "management and accounting activities in this
state on behalf of a non-admitted captive insurance company that insures solely
directors' and officers' liability insurance for the directors and officers of
its parent and affiliated companies; provided, that this provision does not
exempt an insured or insurer from the payment of an applicable tax on premiums
or any other applicable provision in this code . . ."

INSURANCE COMPANY, an insurance company operating without a license from the
Texas Department of Insurance and without a Certificate of Authority through
the Texas Secretary of State, was determined to be subject to the Texas premium
receipts tax and the Texas franchise tax. The company has paid franchise tax
for the years covered by this assessment. One state statute also provides for
a franchise tax exemption for non-licensed insurers that are required to pay or
who pay state tax on gross receipts.

INSURANCE COMPANY has requested a redetermination of the assessment on the
basis that the company should not be required to pay both the Texas premium
receipts tax and the Texas franchise tax.

Discussion:

The auditor determined that INSURANCE COMPANY performed the business of
insurance in Texas, as defined in Article 1.14-1, Section 2, Texas Insurance
Code, therefore, the company is subject to the premium tax under Section 11 of
that article. Section 2 does not provide an exemption for the premium tax, but
instead states that the regulatory portions of Section 2 do not apply to the
placement of such insurance in the state, "provided, that this provision does
not exempt any insured or insurer from the payment of any applicable tax on
premiums or any other applicable provision in this code . . ."

There are five statutes that exempt certain insurers from franchise taxes.
Under these statutes, there is limiting language that does not allow exemptions
to all insurers. Those statutes are as follows:

Article 4.06, Texas Insurance Code states that "No occupation tax other than
herein imposed shall be levied by the State or any county, city or town, upon
any insurance organization herein subject to the occupation tax in proportion
to its gross premium receipts, or its agents. The occupation tax imposed by
this chapter shall be the sole occupation tax which any company doing business
in this State under the provisions of this chapter shall be required to pay."

This article is specific to insurers subject to the gross premiums taxes listed
under Chapter 4, Texas Insurance Code. Article 4.10 applies to property and
casualty insurers licensed by the Texas Department of Insurance to write
business in this state. Article 4.11 applies to life, accident and health
insurers and health maintenance organizations licensed by the Texas Department
of Insurance to write business in this state. As a result, Article 4.06 does
not provide a franchise tax exemption to non-licensed insurers.

Article 4.10, Section 14, Texas Insurance Code is an exemption for property and
casualty insurers and duplicates what is covered in Article 4.06.

Article 4.11, Section 9, Texas Insurance Code is an exemption for life,
accident and health insurers and health maintenance organizations and
duplicates what is covered in Article 4.06.

Article 9.59, Texas Insurance Code places a gross premium tax on licensed title
insurers and title insurance agents. Section 8(a) and (b) provide an exemption
from occupation taxes and other state taxes on licensed title insurers and
agents subject to the premium receipts tax under that article. Article 9.59
does not provide a franchise tax exemption to non-licensed insurers.

Title 2, Tax Code, Section 171.052 states that "A corporation that is an
insurance company, surety, guaranty, or fidelity company now required to pay or
who pays an annual tax measured by their gross receipts is exempted from the
franchise tax."

34 TAC 3.541 (c)(1) states that "All insurance, surety, guaranty, or fidelity
companies that are subject to the annual premiums tax levied by the Insurance
Code, sec. 4.10 or 4.11, or the additional taxes on gross premiums levied under
the Insurance Code, and that have not been exempted from the gross premiums
taxes, are exempt from payment of the franchise tax regardless of whether any
gross premiums taxes are actually paid in any given year. No other franchise
tax exemption is allowed for any insurance company or surety, guaranty, or
fidelity company.

Decision:

This rule appears to follow the exemptions listed earlier except that it does
not specifically mention taxes levied under Article 9.59, Texas Insurance Code.
Instead, it replaces the specific reference to Article 9.59 with "or the
additional taxes on gross premiums levied under the Insurance Code."

Based upon the cited statutory exemption language and the franchise tax rule,
the franchise tax exemption will be recognized for this company and the
franchise tax payments made shall be allowed as a credit against the premium
tax assessment.

Please call 1-800-531-5441 if you have questions about the above information.
If your questions are about franchise tax, call Teresa Comer at extension
3-3958. Gary Johnson at extension 3-4068 can help you with questions about
insurance taxes. If I may be of further assistance, my extension is 3-4622.

Sincerely,

Stefanie B. Medack
Exempt Organizations Section

cc: Wade Phillips
General Counsel Division