Proposed legislation that would limit a tax deduction for reinsurance premiums paid to a foreign affiliate of a US insurer has drawn the formal opposition of the German government.  Ambassador Klaus Scharioth, in a recent letter to House Ways and Means Chairman Sander Levin (D-MI), said that the so-called Neal Bill (HR 3424) “goes well beyond” the undisputed goal of combating tax avoidance and evasion and, as a result, conflicts with provisions of the German-US tax treaty.

US Representative Richard Neal (D-MA) introduced HR 3424 in July 2009.  It would prevent US-based insurers from taking a tax deduction for reinsurance premiums paid to a non-US affiliate, to the extent that the premium charged exceeds the industry average premium for third-party reinsurance.  A copy of the Neal Bill can be found here.  We previously blogged about the Neal Bill here and here.

The German government’s letter noted that the proposed legislation would not affect the deductibility of premiums paid by a US-based insurer to an affiliated reinsurer domiciled in the United States.  As a result, the ambassador wrote, the legislation violates a prohibition on discrimination contained in the tax treaty.  According to the letter, the legislation would also violate the arm’s-length principle incorporated into the treaty, as well as various World Trade Organization rules.

The Neal Bill remains before the House Ways and Means Committee.