Validus Reinsurance Ltd has won a second court battle with US tax authorities that could have wider significance for fellow Bermuda reinsurers.

The US Court of Appeals, District of Columbia Circuit, handed down a summary judgment dismissing the appeal of the Internal Revenue Service against Validus’ initial court victory.

Validus had sued the IRS seeking a refund on excise tax that the company believed had been wrongly levied on reinsurance transactions that were conducted with non-US reinsurers and which took place out side the US.

In February last year, the firm won the case and judges dismissed the IRS appeal on May 26.

Validus sold reinsurance to US insurers covering US risks. However the business at issue in the case involved Validus taking out second-level reinsurance — effectively the reinsurance of reinsurance — described as “retrocession”.

The IRS had put forward a “cascading tax” theory in favour of taxing further layers of reinsurance when the underlying insurance risk was in the US.

In its decision, the appeals court stated: “We affirm the grant of summary judgment, albeit on narrower grounds, to Validus on its refund claims.”

The court concluded that the relevant law was “ambiguous with respect to its application to wholly foreign retrocessions. Neither the text, context, purpose, nor legislative history provide a clear indication of congressional intent to rebut the presumption against such expansive extraterritorial application.”

Validus yesterday declined to comment on the case.

But Tracy Williams, one of the Sidley Austin LLP lawyers who represented the Bermuda firm, said: “The decision confirms the industry’s view that the IRS ‘cascading tax’ theory was a tremendous overreach.”

Brad Kading, president of the Association of Bermuda Insurers and Reinsurers (ABIR) said the judgement was a “common sense decision” that had presented “good arguments against the incorrect extraterritoriality approach in the application of the law”.

The decision will help to clarify US tax liabilities on similar retrocessional business for Bermuda reinsurers and could potentially open the door for others to seek tax refunds from the IRS.

According to Brenda Viehe-Naess, of Washington Advocates Group, there are several cases pending in IRS appeals in which reinsurers have paid the tax under protest and have been waiting for the outcome of this case. “I think there are a lot of foreign insurance companies that will be pleased and will want their money back,” she said.

“I think it’s a terrific victory and a very well-crafted decision that makes it very clear that the section 4371 excise tax doesn’t apply to wholly foreign reinsurance transactions.”