The Office of General Counsel issued the following opinion on July 12, 2005 representing the position of the New York State Insurance Department.
Re: Commercial Lending by an LLC Owned by an Unauthorized Insurer - Retaliatory Tax Inquiry.
Question Presented:
Would the entity conducting the below-described proposed transaction be subject to the retaliatory tax imposed pursuant to N. Y. Ins. Law § 1112 (McKinney Supp. 2005)?
Conclusion:
No, the entity conducting the below-described proposed transaction would not be subject to the retaliatory tax imposed pursuant to N. Y. Ins. Law § 1112 (McKinney Supp. 2005).
Facts:
The inquiry relates to the fact pattern addressed by this Office previously by letter dated April 6, 2005. To reiterate, the inquirer's client, ABC Life ("ABC") is an Illinois domiciled life insurer. It is not licensed to conduct an insurance (or any other type) business in New York State. It does not solicit or transact business of any kind in this state.1 ABC intends to form a limited liability company (the "LLC") under Delaware law, of which it will be the sole owner and manager. The business purpose of the LLC will be as follows:
[T]o engage in any lawful business permitted under the laws of Delaware or the laws of any jurisdiction in which the limited liability company may do business, including specifically the conduct of commercial real estate mortgage lending, but specifically excluding the conduct of an insurance business.
The LLC will not be registered as an insurance company, nor does it intend to solicit or transact any insurance business. The LLC does intend to apply for authority to conduct business in New York as a foreign limited liability company. The LLC will act through its sole and managing member, ABC, in the conduct of its business, including the making of commercial real estate mortgage loans secured by New York real property. The inquirer further stated that both ABC and the LLC intend to comply with N.Y. Ins. Law § 2117 (the prohibition on acting for or aiding and unlicensed insurer), and N.Y. Ins. Law § 2122, (the prohibition on advertisements of or public announcements for unlicensed insurers).
Analysis:
The present inquiry relates to the applicability of the retaliatory tax imposed upon certain foreign insurers to a foreign insurer that, while not conducting an insurance business in New York, is in fact engaging in a non-insurance business in New York through a wholly owned limited liability company (LLC). The New York Insurance Law imposes a retaliatory tax upon foreign insurers doing business in New York state in instances where a New York insurer would be subject to more onerous taxes, fees, etc. for operating in such state than would a domestic insurer operating in that state. N.Y. Ins. Law § 1112 provides, in pertinent part, as follows:
(a)(1) If, by the laws, or the action of any public official, of any other state, any insurer organized or domiciled in this state, or its duly authorized agents, shall be, required to pay taxes, fines, penalties, fees for licenses or certificates of authority or any other sum for the privilege of doing business in such other state, or shall be subjected to any restrictions, obligations, conditions, or penalties, imposed for such privilege, and such requirements are greater than those required of similar insurers organized or domiciled in such other state by the laws of this state for the privilege of doing business herein, then all similar insurers organized or domiciled in such other state shall make like deposits for like purposes with the superintendent, and pay him for taxes, fines, penalties, fees for licenses or certificates of authority or for any other requirement for the privilege of doing business in this state, an amount determined in the matter prescribed by such other state, and shall be subjected to such greater requirements imposed by such other state upon similar insurers of this state .
N. Y. Ins. Law § 1112(a) (McKinney Supp. 2005).
The inquirer previously asked whether ABC or LLC will be considered to be improperly engaging in the business of insurance in contravention of New York law. In this Offices letter dated April 6, 2005, it was concluded that neither would be regarded as doing so. The present inquiry is whether or not ABC would be subject to retaliatory taxation by New York as a result of the proposed commercial lending activities.
If a foreign state imposes taxes, fines or fees upon New York domiciled insurers and such taxes exceed those imposed by New York State upon the insurers of that jurisdiction, the Superintendent is empowered to impose a "retaliatory tax" upon the insurers of that jurisdiction. The purpose of the retaliatory tax is to ensure that New York domiciled insurers doing business in other states are not burdened with excessive or discriminatory taxes, fees, or penalties in those jurisdictions. It is the position of the Department that the retaliatory tax is applicable only to taxes that are imposed upon insurance companies solely due to their operation of an insurance business. This view is consistent with the finding of the Court of Appeals in Industrial Indemnity Company et al. v. Cooper, 595 N.Y.S.2d 726 (1993). That case addressed the propriety of the Superintendent's disallowance of a credit against the retaliatory tax imposed on foreign insurers for payment of the New York City Commercial Rent or Occupancy Tax, and held that Section 1112 of the Insurance Law could properly be interpreted as applying only to tax payments specifically made for the conduct of an insurance business.
As it is the Departments position that the retaliatory tax is imposed only in connection with the conduct of an insurance business (and the imposition of taxes imposed for the conduct of such business), ABC should not be subject to retaliatory tax by reason of its real estate lending activities in New York through its wholly owned LLC.2
For further information you may contact Supervising Attorney Michael Campanelli at the New York City office.
1 The inquirer stated that ABC does receive some premium income (so-called orphan premiums) from individual insureds who are currently resident in New York but who had initially obtained policies of life insurance from ABC when they were resident elsewhere.
2 The inquirer noted that the Department of Taxation and Finance, in an Advisory Opinion [TSB-A-99(28)C (November 10, 1999)] found that a similarly situated unauthorized insurer would be subject to (but not liable for) franchise tax under Article 33 of the N. Y. Tax Law, with the result that such insurer would be responsible for filing a franchise tax return. The inquirer contended that even though ABC would likely be required to file a New York franchise tax return, it would nevertheless not be subject to retaliatory tax by reason of the fact that it is not engaged in the business of insurance in New York. This Office concurs with that conclusion.