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Legitimate Captive Insurance Companies Are Not Driven by Tax Planning Strategies

Stock Market
December 16, 2016

Here is a message that needs to be delivered to all those involved in advising, regulating, or legislating tax policy: captive insurance companies are genuine risk management organizations that add value to their owners.

An Aon Risk Solutions white paper issued in July 2016, Base Erosion and Profit Shifting (BEPS): Exploring Why Captive Insurance Companies Are Legitimate Risk Management Solutions Adding Value to Their Owners, shared its views that captives "are genuine insurance or reinsurance undertakings which form an integral part of the risk management system of their owner, they are fully regulated by the insurance supervisory authorities in each jurisdiction, they are subject to governance and control requirements, and they are fully transparent. They also form an integral part of the worldwide insurance and reinsurance market and are fully supported by commercial insurers or reinsurers with whom they deal."

The Aon white paper was written as a response to the action plan by the Organization for Economic Cooperation and Development (OECD) that related to shifting profits for the purposes of achieving little or no taxation. It is an excellent resource for the proactive efforts that will need to be made to educate tax policy makers in the months ahead.

The Aon white paper’s summary of what captives are and are not is worth repeating here.

  • "They are a genuine risk management strategic tool for group companies, and are not driven by tax planning strategies."

  • "They are not artificial structures."

  • "They do not create any unfair competition between domestic and multinational corporations."

  • "They are not set up to shift profits from one country to another one."

  • "They are contributing to consumer protection and improved products."

Read the multiple reasons that support each of the items in the summary, and compare each to the BEPS objectives of OECD.

OECD is an international intergovernmental organization with 35 member countries, including the United States.

At the US level toward the end of last year, Congress enacted legislation that had one purpose of assuring that captives that elected to be taxed under the provisions of Section 831(b) were doing so for legitimate risk management reasons and not primarily for avoiding taxes, which is a reason for the use of the word "legitimate" in the headline of this article.

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