Risk Shifting as a Tax-Deductibility Requirement

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

As touched on in the video "Tax-Deductibility of Captive Insurance Premiums," P. Bruce Wright of Eversheds Sutherland (US) LLP explains that for an insurance transaction to occur, risk transfer or risk shifting from one party to another and risk distribution are required. In risk transfer, there must be an actual economic transfer of the burden of risk for an exposure. For instance, premium cannot be equal to the policy limits, and a retrospective insurance policy does not qualify as insurance. At the same time, the insurer must have sufficient risk distribution either via a percentage (~30–50 percent) of unrelated (i.e., third-party) business or via a certain minimum number of subsidiaries (~12), as determined by the Internal Revenue Service (IRS) and the courts. Several high-profile cases have significantly impacted the interpretation of these requirements, and further clarification from the courts will likely result.