Captive Tax Issues Videos

  • Why Is Tax-Deductibility of Captive Premiums Important?

     
    Captive Tax Issues | P. Bruce Wright | Partner | Eversheds Sutherland (US) LLP

    Tax-deductibility of premiums is a key issue for captive insurance companies, and in this video P. Bruce Wright of Eversheds Sutherland (US) LLP discusses why. In most situations, if the premium collected by a captive insurance company is not considered to be part of an insurance contract (as far as the Internal Revenue Service is concerned), the result is an inability for the captive insurance company to write off its reserve—which is taken out of that premium—as a deduction. This generally means that the benefit from that deduction is spread out in time, which is less desirable. For 831(b) captive insurance companies, the benefit of being able to write off reserves as a deduction is lost.



  • Tax-Deductibility of Captive Insurance Premiums

     
    Captive Tax Issues | P. Bruce Wright | Partner | Eversheds Sutherland (US) LLP 

    As discussed in the video “Why Is Tax-Deductibility of Premiums to a Captive Important?” by P. Bruce Wright of Eversheds Sutherland (US) LLP, captive insurance companies would prefer their premium to be tax-deductible. This video explains that in order for any insurance premium to be tax-deductible, the insurance contract must have all of the attributes of an insurance policy and the subject of the policy must be insurable for tax purposes. Also, an actual economic transfer of the burden of risk must take place, and the insurer must have sufficient risk distribution to allow payment for losses to come from that premium.



  • “Insurance Risk” as a Tax-Deductibility Requirement

     
    Captive Tax Issues | P. Bruce Wright | Partner | Eversheds Sutherland (US) LLP

    As touched on in the video “Requirements for Tax-Deductibility of Captive Insurance Premiums” by P. Bruce Wright of Eversheds Sutherland (US) LLP, it is important to determine whether or not the exposure being "insured" is indeed insurable for tax purposes. One of the most important factors in this undertaking is whether or not there is an insurable interest on the part of the "insured," which is not the case for situations involving derivatives, for example. Several other instances that would not be considered insurance from the point of view of the Internal Revenue Service are coverage for business risks (which are completely under the control of the "insured"), residual value, or retroactive insurance.



  • Risk Shifting as a Tax-Deductibility Requirement

     
    Captive Tax Issues | P. Bruce Wright | Partner | Eversheds Sutherland (US) LLP

    As touched on in the video “Requirements for Tax-Deductibility of Captive Insurance Premiums” by P. Bruce Wright of Eversheds Sutherland (US) LLP, there must be an actual economic transfer of the burden of risk for an exposure to be considered insurable for tax purposes. At the same time, the insurer must have sufficient risk distribution, either via a certain percentage of unrelated business or via a certain minimum number of subsidiaries, as determined by the Internal Revenue Service and the courts, to adequately cover payment of losses with the premium collected. Several high-profile cases that have significantly impacted the way that this requirement is interpreted, and likely will result in further clarification in the courts of the involved issues, are also reviewed in this video.



  • Taxation of 831(b) Microcaptives and IRS Concerns

     
    Captive Tax Issues | P. Bruce Wright | Partner | Eversheds Sutherland (US) LLP

    In this video by P. Bruce Wright of Eversheds Sutherland (US) LLP, the special case of taxation of microcaptive insurance companies is addressed. Section 831(b) of the Internal Revenue Code applies to companies with less than $1.2 million in premium income (microcaptive insurance companies) that are less likely to have enough risk distribution via unrelated business and more likely to need pooling arrangements with other companies. These companies do not pay taxes on their underwriting income and do not take a deduction for their losses. All of the requirements normally in place for a captive insurance company’s premium to be tax-deductible also apply to 831(b) companies. Additionally, recent concerns have become a focus within the Internal Revenue Service, such as the types of exposures being insured by these companies, as well as whether there is an actual transfer of risk in these situations.



  • Taxation of Cell Captives

     
    Captive Tax Issues | P. Bruce Wright | Partner | Eversheds Sutherland (US) LLP

    P. Bruce Wright of Eversheds Sutherland (US) LLP discusses the evolution of taxation for cell captive insurance companies in this video. This issue has been problematic for the Internal Revenue Service (IRS) to deal with, so much so that the IRS has actually requested comments from concerned parties about proposed regulations on taxation of the individual cells in a cell captive insurance company, while deductibility of premiums for those companies would be handled by separate regulations. Domestic cell captive insurance companies are treated differently from offshore companies. Many of these issues have yet to be resolved by the IRS at this time.



  • More on Taxation of Cell Captives

     
    Captive Tax Issues | Gary Bowers | Partner | Johnson Lambert LLP

    Here, Gary Bowers of Johnson Lambert also briefly discusses the evolution of taxation for cell captive insurance companies. For taxation purposes, cell captive insurance companies have historically been required to file a single consolidated tax return for all the members of the cell, but in recent years another approach has emerged. Now, for members with the minimum $1.2 million in premium, the decision as to whether or not their component of the cell should be treated as its own insurance company in terms of tax filing as well as the contractual segregation built into the cell is made by the member. Among other options, such members may elect whether to claim the small property and casualty exception (to be taxed on investment income only), as well as whether to file a 953d.



  • Disclose Foreign Accounts and Comply with FATCA

     
    Captive Tax Issues | Gary Bowers | Partner | Johnson Lambert LLP

    The Foreign Account Tax Compliance Act, as Gary Bowers of Johnson Lambert explains in this video, amounts to the gathering of robust data by the federal government about entities that have money in offshore accounts, for the purpose of deterring the concealment of such offshore funds. Up-front disclosure of offshore accounts meets the requirements for compliance, while expensive fines are assessed for failing to disclose such information accurately. Some tax professionals prefer not to have clients who are unwilling to be in compliance with this law.



  • Beware of Forming a Captive for Estate Planning or Tax Avoidance

     
    Captive Tax Issues | Steven McElhiney | President & 
    CEO | EWI Re, Inc.

    Microcaptives, or insurance captives formed for smaller degrees of premium and capitalization, can be highly beneficial. However, if formed for the wrong purposes, these types of insurance captives can be a risky endeavor. In this video, Steve McElhiney, president and CEO of EWI Reinsurance, discusses some of the motivating factors behind forming an insurance captive, differentiating between those that are likely to lead to positive results and those that are more likely to come under IRS scrutiny.