Tax Considerations When Choosing a Captive Domicile

Captive Insurance Domicile 2In our previous newsletter, we examined the domiciles (locations) where small and intermediate captive insurance companies are formed and regulated, and we looked at the various differences between on-shore and off-shore domiciles.We continue the discussion of captive domicile selection with a shift in focus to tax considerations involved in selecting a domicile to incorporate a captive insurer.Capstone offers a selection of U.S. and foreign domiciles in which to incorporate your captive.

Domicile selection is something which our affiliated law firm analyzes with the client on a case by case basis in a series of meetings. Ultimately, it is the client's decision whether to incorporate, typically in a British jurisdiction, versus one of several U.S. states.
In either case, the U.S. federal taxation is the same, at least as Capstone implements the planning.More specifically, in the case of a British-based captive insurer, Capstone takes "offshore taxation" off the table by domesticating in the U.S. the British-domiciled captive so that it is always a U.S. company for tax purposes.

Under a special provision of the U.S. Internal Revenue Code, a foreign insurer with IRS approval may become a "U.S insurer". This is Capstone's usual approach with its clients that form a non-U.S. insurer. The tax work is conducted by The Feldman Law Firm LLP and its staff of well qualified tax lawyers.What About the Obama Administration's Proposals For Offshore Entities?

Prevalent in the news recently has been the Obama Administration's promise of greater scrutiny of the taxation of offshore entities. While our President's proposals are good ones, they have little application to alternative risk planning, at least as carried out by Capstone.Our clients' captives--even when incorporated abroad--are U.S. companies for tax purposes. Capstone-administered captives file U.S. tax returns and have taxpayer EINs. They are taxed under special U.S. tax provisions providing for either full or partial tax exempt status if these companies comply on an ongoing basis with the many requirements of the IRS Code. Not complying with this highly technical legal area leads to significant penalties. It is for this reason our affiliated law firm remains highly involved.

Proper Tax Structuring AND Management of the Insurer Is Critical

It is well recognized that captive insurers, at least as to "for profit" companies, are in large part a creation of the Internal Revenue Code. This is because the Code only allows an "insurance company" to currently deduct future, as yet unidentified, losses. In contrast, a business entity, other than an insurer, can only deduct losses once they have occurred. Proper tax structuring and management of the insurer so as to satisfy the many requirements of the Internal Revenue Code is critical to the ongoing success of the insurance arrangement if a current tax deduction is to be achieved. Combined with the management of the insured risks and the investment of the insurer's assets, these are among the key lynchpins to the insurer's success.

Many times over the years, Capstone has been offered the opportunity to "clean up" captives formed or operated by, for example, property & casualty insurance brokers who dabble in the area or who only take responsibility for a portion of the overall captive planning.

A few months ago, we were offered the opportunity to "clean up" a captive run by a prominent, now federally assisted, insurance company for a significant privately held company which has hundreds of employees and hundreds of millions in revenues. In the details of its engagement agreement, the insurance company excluded from its scope of work anything other than forming the captive and writing and adjusting coverages (no legal services, no U.S. or foreign tax, no regulatory or auditing services were included, nor were legal services for financings included). As a result, the planning failed at great tax cost to the client who assumed that its "captive manager" was taking responsibility for all aspects of the planning.

Because of the many moving parts and required professionals needed to successfully implement and operate an alternative risk planning arrangement, great care should be given to the choice of your team in running your captive. Having formed over CAPTIVE_FORMATIONS captive insurance companies in multiple domiciles over the last CAP_YEARS_NUMBER years, Capstone has the experience and expertise to manage, on a turnkey basis, highly sophisticated alternative risk planning entities.


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