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  • Uploaded on JUN 2 - 4, 2014. An Introduction to Captives and the Bermuda Domicile. Moderator: Peter Willitts, President, Liberty Mutual Management Speakers: Liz Cunningham, Senior Manager, Deloitte Ltd Leslie Robinson, Assistant Director, Bermuda Monetary Authority

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JUN 2 - 4, 2014

an introduction to captives and the bermuda domicile
An Introduction to Captives and the Bermuda Domicile


  • Peter Willitts, President, Liberty Mutual Management


  • Liz Cunningham, Senior Manager, Deloitte Ltd
  • Leslie Robinson, Assistant Director, Bermuda Monetary Authority
  • Scott D. Slater, Senior Manager, PricewaterhouseCoopers
  • Kent Smith, Associate, Conyers Dill and Pearman

An Introduction to Captives and the Bermuda Domicile


  • The Truth About Bermuda
  • What and Why a Captive
    • Including Actuarial and Consulting Considerations
  • Overview of Legal and Governance Issues
  • Regulatory Overview
  • Tax Considerations Made Simple

The Truth About Bermuda

  • 650 miles east of Cape Hatteras, N.C.
  • 23 square miles, population over 60,000
  • Dependent Territory of United Kingdom
  • World’s # 1 Captive Domicile with 862 captives domiciled at December 31, 2011
  • 3rd largest reinsurance market in the world
  • Over 30 of the top reinsurers in the world are based in Bermuda – exceeding the number in any other country

The Truth About Bermuda

So How is it working for the insurance market?

  • 1960s: Frederic Reiss – Birth of captives in Bermuda
  • Mid 1980s: Excess Liability market – ACE, XL
  • 1990s: Reinsurance market – Hurricane Andrew
  • New waves of capital
    • 2001 response to September 11, 2001
    • 2005 response to hurricanes
    • Innovation in Policy Forms, Cell Companies, Captive Pooling and other specialized commercial vehicles, such as SPIs and Sidecars

The Truth About Bermuda

How is it working for Captives?

  • Almost 100 captives have been domiciled in Bermuda for over 40 years, and another 300 for over 30 years
  • Companies from over 40 countries spanning the globe have domiciled their captives in Bermuda
  • In addition to the accounting community, there are 275 professionals in Bermuda with the CPCU or ACII designations – the largest concentration within a quarter square mile anywhere

The Truth About Bermuda

General Insurers

  • Class 1 266 22.0%
  • Class 2 307 25.4%
  • Class 3 254 21.0%
  • Class 3A 104 8.6%
  • Class 3B 16 1.3%
  • Class 4 31 2.6%
  • Blue means Commercial Insurers

Place Title Here

Long-Term Insurers

  • Class A 2 0.2%
  • Class B 0 0.0%
  • Class C 79 6.5%
  • Class D 6 0.5%
  • Class E 14 1.2%
  • Special Purpose Insurer 55 4.5%
  • Dual Licences 75 6.2%
  • TOTAL 1209
  • Blue means Commercial insurers

The Truth About Bermuda

Comparative Number of Captives?

Bermuda 831

Cayman 759

Vermont 588

Guernsey 344

Utah 342

Delaware 298

2013 Worldwide 6,559

2012 Worldwide 6,125

Liz Cunningham, Senior Manager

Deloitte Ltd.

What and Why a Captive?

including Actuarial and Consulting considerations


What is a Captive?

An insurancecompany

that providesinsurance toand is

controlledby its owners.



  • In essence, a premium funding vehicle for insuring losses of the parent, or its affiliates, for a specific retention level.
  • A financing mechanism that increases its insured’s control over coverage that can produce a lower net present value cost of risk financing than commercial alternatives.
  • Will be the preferred alternative to risk retention or commercial insurance if insureds/ owners have
      • Ability to retain risk
      • Motive (and ability) to pre-fund losses


  • Formed to primarily insure, or reinsure the risks of:
    • its parent,
    • affiliates
    • or of a number of parties with risks in common,
    • or unrelated risk
  • Licensed insurance company
  • Regulated under its own legislation
  • Usually formed in a specialized environment or “domicile” – “onshore” or “offshore”
  • Licensed only in its domicile and unlicensed in all other jurisdictions

Parent Company and Subsidiary





R/I Market

Types of Captives

  • Single Parent (Direct) Captive:
  • Owned by a single parent and
  • insuring only its parents risk
  • exposures

Parent Company and Subsidiary





R/I Market

Types of Captives

  • Single Parent (Indirect) Captive:
  • Owned by a single parent and reinsures (part of) the risks of its parent ceded by a “fronting” insurer.
  • Captive acts as a reinsurer.











Types of Captives

  • Multi/Owner Group Captive:
  • Owned by more than one parent and (re) insuring the risks of all owners.
  • Association Captive:
  • Owned by members of a
  • common industry or trade
  • association.
  • This type of captive is designed
  • to insure the risks of that
  • industry among its members.
  • Participation is limited to
  • members of the association.

*O/I = Owner Insured


Cell 2

Cell 3

Cell 1

Cell 4

Cell 6


Cell 5

Types of Captives

  • Segregated Account Company:
  • Each cell is built around a central core account and insures the risk of a different owner.
  • There is no risk sharing between the cells.

Why Form a Captive?

  • Benefits come in three main forms:
      • Financial
        • Cost Saving
        • Cash-flow
      • Risk Management
        • Coverage
        • Capacity
        • Control
      • Profit Center
        • Connected/controlled third party business

Understanding insurability

Low Frequency

High Severity

High Frequency

High Severity


Low Frequency

Low Severity

High Frequency

Low Severity



Insurable Risk Confidence Level

Insurable Risk Tolerance Level








Possible Captive Retention

Probability of Loss


Value ($)

Markets won’t

insure or

will charge



Earnings &

Working Capital

can sustain


Earnings & Equity Capital

are sensitive to losses

Equity holders

may be willing

to chance a


Risk Retention Strategy

Risk Transfer Strategy

Is the Risk Transfer and Financing

Paradigm Changing?


Understanding the Market

- - - = Captive Performance

Rates High

Losses High

No Market Capacity

Rates Low

Losses Low

Insurance easy to buy


When Does a Captive Make Sense?

  • Insurance buyer has greater knowledge and understanding of the value a captive program can bring to an organization
  • Desire for greater flexibility in program design
  • Desire for broader and simpler insurance contracts
  • Anticipation of hard market pricing
  • Desire to obtain coverage for non-traditional exposures for which no other alternative exists
  • Insurance programs of significant premium size
  • Good loss experience
  • Degree of loss control capability
  • Commitment of senior management
  • Clearly defined objectives
  • Significant lag between loss occurrence and payment dates
  • Level of risk retention determined
  • Co-operation of direct & reinsurance markets
  • Possible tax benefits

Reasons Not to Form a Captive

  • Insurance markets are cost effective
  • Unable to make long term or capital commitment
  • Inappropriate risk profile
  • Tax and regulatory complications
  • Insufficient premium volume
  • Lack of risk appetite

Initial Steps To Forming A Captive

  • Risk Assessment (Exposures & Appetite for Risk)
  • Design
    • Coverages
    • Limits/Retentions/Deductibles
    • Capitalization
    • Domicile
  • Funding and Feasibility Study
    • Expected Losses
    • Expenses
    • Capitalization
    • Pro Forma Financials
    • With Business Plan, Basis for the Captive Application

How the Actuary can help

  • Project ultimate cost of future loss payments for…
    • Funding study
    • Feasibility assessment
    • Captive design (coverages, limits, retentions etc)
    • Reinsurance structure
    • Ongoing reserve setting
    • Statutory reporting requirements

Data is key!

  • Overview of subject business (classes, nature etc)
  • Claims triangulations by class
  • Individual claims experience (by class / geographical area)
  • Historic exposure information (payroll, property schedule etc)
  • Financial statements of captive and parent
  • Limits and attachment point profiles
  • Details of any inuring reinsurance
  • Details of any anticipated exposure changes over the next few years

Loss Development Triangles

  • These are tables that show changes in value of a group of losses (either paid or reported) or claim counts over time
  • Loss development triangles are typically used to derive expected reporting/payment patterns
  • Example of a reported loss triangle:
  • Dimensions in a development triangle:
    • Rows represent accident years
    • Columns represent age or maturity
    • Diagonals represent the valuation date



common actuarial methods for estimating ultimate loss
Common Actuarial Methods for Estimating Ultimate Loss
  • Ultimate loss = cumulative paid loss (known) + case reserves (known) + Incurred But Not Reported (estimate).
  • The relationships among these three components vary tremendously by line of insurance, by jurisdiction, and by time interval being reviewed (e.g., recent accident years versus mature accident years). The relationships also vary from captive to captive depending on the captives’ claims management philosophies and procedures.
  • For short-tail lines e.g. auto liability paid claims and case reserves typically represent a high proportion of ultimate claims at early maturities.
  • For long-tail lines e.g. medical malpractice or workers compensation, there is a lengthy period associated with reporting and settlement of claims.



common actuarial methods for estimating ultimate loss1
Common Actuarial Methods for Estimating Ultimate Loss
  • Most common actuarial methods include:
    • Expected loss Method
    • Loss Development Method
    • Bornhuetter-Ferguson Method
  • No single method can produce the best estimate in all situations. Actuaries use more than one method and select, using actuarial judgment, the most appropriate estimate




Unique Risks of Captive

  • Availability of data
  • Quality of data
  • Timing differences
  • Solvency of other parties (i.e. reinsurers)
  • Complex or bespoke programs
Kent Smith, Associate

Conyers Dill & Pearman

Overview Legal & Governance Issues

key governing statutes
Key Governing Statutes
  • Companies Act 1981
  • Insurance Act 1978

- Insurance Accounts Regulations 1980

- Insurance Returns & Solvency Regulations 1980 (together, the “Regulations”)

  • SAC Act 2000 (for SACs)
establishment in bermuda
Establishment in Bermuda
  • Incorporation in Bermuda
  • Merger / Amalgamation into Bermuda
  • Continuance into Bermuda
insurance act license classifications
Insurance Act – License Classifications
  • General Business
    • Classes 1,2 & 3 – Captives
    • Classes 3A, 3B, 4 - Commercial
  • Long Term (annuity, life accident & health)
    • Classes A & B – Captives
    • Classes C,D & E – Commercial
segregated accounts
Segregated Accounts
  • Any general business or long-term insurer wishing to operate segregated accounts may apply to be registered under the Segregated Accounts Companies Act 2000 (SAC Act).
process to establish company in bermuda
Process to Establish Company in Bermuda
  • Application to incorporate / amalgamate / merge / continue into Bermuda / register under SAC Act is made to the ROC.
  • Beneficial owners (10% + beneficial owners) to be vetted by the lawyers and approved by the BMA (per Exchange Control Act 1972).
  • Application to incorporate can be made separately from the insurance license application (but is often made in tandem).
  • For amalgamations / mergers / continuances / SAC registrations, completion of the transfer may not occur until the BMA provides its non-objection to the ROC.
registration under the insurance act
Registration under the Insurance Act

Pre-Licensing Considerations

  • Decision made to form captive / re-domicile into Bermuda
    • Consideration given to class of captive
  • Selection of service providers
    • Insurance Manager
    • Lawyers
    • Auditors
    • Banker
    • Actuary / Loss Reserve Specialist
registration under the insurance act1
Registration under the Insurance Act

Pre-Licensing Documentation

Consists of:

  • Business Plan
  • 5 year pro-forma financials (Balance Sheet and Income Statement)
  • Pre-incorporation Form
  • Parent company financial statements
  • Resumes (senior management / directors)
  • Acceptance letters for service providers
  • SAC Form 1 (if applying for SAC registration)
registration under the insurance act2
Registration under the Insurance Act

Pre-Licensing Application

  • Application filed with BMA by 5:00pm on Monday prior to ALC consideration at their weekly meeting the following Friday.
  • Four possible outcomes
    • Approved
    • Approved, but subject [ ]
    • Deferred
    • Declined
organising the company
Organising the Company

(a) Meetings to be held:

- Provisional Meeting

- Statutory Meeting

- 1st Board Meeting

(b) Items to be approved:

- Approval of service providers (auditors, insurance manager, principal representative, resident representative, approved actuary / loss reserve specialist etc.)

- Bank account opening

- Bye-Laws

formal insurance license application
Formal Insurance License Application
  • Once required capital is paid into company, Form 1B (registration application) may be submitted to the BMA.
  • Insurance license may be issued in three days if application complete.
  • Captive can start writing business once certificate of registration has been issued.
insurance act main provisions
Insurance Act – Main Provisions

1. Minimum paid-up Share Capital

- $120,000 for Classes 1,2 & 3

- $120,000 for Class A

- $250,000 for Class B

2. Principal Representative and Principal Office / SAC Representative

  • All Bermuda Insurers are required to maintain a principal office and appoint a principal representative resident in Bermuda (usually the Insurance Manager).
  • SACs must appoint a SAC representative resident in Bermuda.
insurance act main provisions1
Insurance Act – Main Provisions

3.Independent Approved Auditor

  • All Bermuda Insurers are required to appoint an independent approved auditor who will audit and report on the insurer’s statutory financial statements and statutory financial returns.

4.Actuary / Loss Reserve Specialist (LRS)

- Class A & B insurers must appoint an approved actuary – must be an individual-responsible for preparing the actuary’s certificate filed with annual statutory return.

- Class 2 and 3 insurers (and Class 1s if required by the BMA) must appoint an approved loss reserve specialist – must be an individual – responsible for preparing the LRS opinion in respect of company’s loss and loss expense provisions in its annual statutory return.

insurance act main provisions2
Insurance Act – Main Provisions

5.Statutory Financial Statements and Returns

  • - Every insurer must prepare annual audited statutory financial statements and submit to the BMA with its statutory financial return.
  • - Rules and guidance for preparation are set out in the Regulations.
  • - Statutory financial statements not prepared in accordance with GAAP.
  • - The statutory financial statements and statutory return are not public documents.
insurance act main provisions3
Insurance Act – Main Provisions

6.Minimum Solvency Margins

An insurer’s statutory assets must exceed its statutory liabilities by an amount greater than its prescribed minimum solvency margin.

7. Minimum Liquidity Ratio (MLR)

Every general business insurer must maintain the value of its relevant assets at not less than 75% of the amount of its relevant liabilities.

insurance act main provisions4
Insurance Act – Main Provisions

8. Restrictions on Dividends and Distributions

  • Company may not declare or pay a dividend or distribution if it is in breach of its MSM (or MLR for general business) or if declaration or payment would cause such a breach.
  • Any company that fails to meet its MSM (or MLR for general business) on the last day of any financial year is prohibited from declaring or paying any dividends during the next financial year without BMA consent.

9. Restrictions on Reduction of Capital

- No Bermuda insurer may reduce its total statutory capital (as per previous year’s financial statements) by 15% or more without prior BMA approval.

insurance act main provisions5
Insurance Act – Main Provisions

10. Insurance Code of Conduct

All Bermuda insurers must comply with the Insurance Code of Conduct.

- Designed to ensure sound corporate governance, risk management and internal controls are implemented.

what is corporate governance
What is Corporate Governance?
  • A system of rules, practices and processes by which a company is directed and controlled.
  • Per the Insurance Code of Conduct, every insurer must establish and maintain a sound corporate governance framework. The framework should have regard for international best practice on effective corporate governance. Corporate governance includes principles on corporate discipline, accountability, responsibility, compliance and oversight.
the role of the directors
The Role of the Directors
  • Directors manage the affairs of a company – “mind and will”.
  • Appointed by the shareholder(s) on an annual basis.
  • Powers generally derive from the constitutional documents of a company, eg bye-laws.
  • Cannot act outside of powers – a company may be able to recover from its directors any loss to the company arising from acts of the directors which constitute a breach of their duties to the company.
  • Duties are generally owed to the company, not to individual shareholders.
board meetings
Board meetings
  • Notice – generally, any director may call a Board meeting at any time on reasonable notice.
  • Quorum – usually 2.
  • Voting - one man/one vote.

- resolutions are passed by simple majority.

- if allowed in the bye-laws, the chairman may cast a tie-breaker vote.

  • Personal Interests – whenever a director has a personal interest in the business of the Company, he must declare it to his co-directors at the first board meeting where the matter is discussed.
  • Written Consents – anything done at a Board meeting can be done by the unanimous written consent of the directors (often called a UWR).
directors duties
Directors Duties

Fiduciary Duties

  • A duty to act in good faith in the best interests of the company (and not for any collateral purpose).
  • A duty to exercise powers for a proper purpose.
  • A director must not put himself in a position where there is an actual or potential conflict between his personal interest and his duty to the company.
  • A director must not take a personal profit from opportunities that result from his directorship.
directors duties1
Directors Duties

Duty of Skill and Care

  • A director must exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
  • A director must diligently attend to the affairs of the company, but he is not bound to give continuous attention to the affairs.
  • A director is entitled to rely on a subordinate put in a position of charge for the express purpose of attending the detail of management. However, directors cannot absolve themselves entirely of their responsibility by delegation to others.
Regulatory Overview

Leslie Robinson, Assistant Director

Licensing & Authorisations

Bermuda Monetary Authority

bma background
BMA - Background

The Bermuda Monetary Authority Act 1969

Independent Regulatory Body / Separate from Government

Board of Directors

Integrated regulator of Bermuda’s Financial Services Sector

bma s main functions
BMA’s Main Functions
  • Under the BMA Act we are:
    • Issuer of Bermuda’s notes and coins
    • Manages exchange control transactions
    • Regulates & Supervises
      • Insurers
      • Banks, trust companies, investment businesses, investment funds, fund administrators
      • Money service businesses
      • Bermuda Stock Exchange
regulatory framework
Regulatory Framework


The way in which the rules are applied


The rules and conditions


The Acts, laws passed by Parliament


The Insurance Code of Conduct

  • Builds on previous longstanding practice and guidance for governance standards, specifically guidance notes on:
          • Corporate Governance
          • Risk Management
          • Internal Controls
  • Codifies these existing guidance notes on governance standards such that they are now legally binding.
  • Captive insurers should be mindful of the proportionality principle in establishing a sound corporate governance, risk management and internal controls framework

Insurer Class Structure

      • General Business Insurers
  • Class 1, 2, 3 – Captive Classes
  • Class 3A, 3B, 4 – Commercial Classes
      • Long-Term Business Insurers (annuity, life, some accident & health)
  • Class A, B – Captive Classes
  • Class C, D, E – Commercial Classes
      • SPIs (insurer fully funds liabilities through a debt issuance or some other approved financing mechanism)
minimum solvency margins
Minimum Solvency Margins

General Business


minimum solvency margins1
Minimum Solvency Margins

Long-Term Business



Bermuda’s Captive Regulation

  • Captive vs. Commercial
  • Risk-Based Approach
  • Role of Principal Representative and Insurance Manager
  • Insurance Manager On-sites
  • Segregated Accounts Companies (Rent-a-Captives)

Pragmatic Approach to Regulation

    • Bermuda: The World’s Risk Capital
    • Creativity and Innovation
    • Modifying accounting regulations/ Section 56 Directions
    • Other approvals
      • Approving “relevant assets”
      • Admitting assets
  • Regulations consistent with International Standards but applied appropriately for Bermuda Market.
captive registrations by the numbers
Captive registrations: by the numbers

Full Year 2013

  • 91 – New insurers registered (up 72% from 53 in 2012)
  • 24 – New captives registered (up 100% from 12 in 2012)
  • YTD April 2014
  • 21 – New insurer registrations (up 5% year-on-year)
  • 4 – New captives registered (flat year-on-year)
international participation
International Participation
  • The BMA contributes to international regulatory developments via active participation in international standard setting bodies, e.g.
    • International Association of Insurance Supervisors (IAIS)
    • Financial Stability Board’s Regional Consultative Group for the Americas
    • National Association of Insurance Commissioners (NAIC)
  • Leadership positions/membership of key working groups and committees
  • Bermuda influences, as well as keeps abreast of, global regulatory developments



International Developments

  • Qualified Jurisdictions Status –NAIC
  • Solvency II Equivalence – European Insurance and Occupational Pensions Authority (EIOPA)
  • Bermuda’s Anti-Money Laundering Regime –International Monetary Fund (IMF)
    • NAIC - 2014
    • EIOPA- 2015
    • IMF- 2016

International Insurance Tax Planning –

The Basic Principles

Tax Considerations Made Simple

Scott D. Slater PwC | Senior Manager, Tax


International Insurance Tax Planning –

The Basic Principles

  • Determine entity-level taxation
    • None if in Bermuda and no elections or activities creating taxable presence
    • Elect or operate in a manner to be taxable based upon benefits achieved
  • Determine shareholder-level taxation
    • Current
    • Deferral
    • Tax rates
  • Determine repatriation plans
    • Dividends
    • Complete liquidation
    • Tax rates
  • Consider non-income taxes
    • premium taxes, FET, withholding taxes, etc.

How is a Bermuda company taxed?

  • Currently, Bermuda does not impose any taxes on income or capital gains nor impose withholding taxes. As such, a Bermuda company would not be subject to income taxation, unless the Bermuda company:
    • has a permanent establishment (“PE”) in a taxing jurisdiction,
    • engages in a trade or business in a taxing jurisdiction,
    • is “managed and controlled” from a taxing jurisdiction,
    • is subject to a gross-level withholding tax imposed by another taxing jurisdiction, or
    • makes an election under IRC §953(d) or (c)(3)(C)

Why is insurance treatment important?

General Rules

  • Reserves accrued for retained risks are not currently deductible for U.S. Federal income tax purposes until losses are paid.
    • Fixed and determinable principle
    • Economic performance principle (ie, payment)
  • Premiums paid to a properly structured captive insurance company to fund retained risk are currently deductible if the coverage period is 12 months or less
    • if greater than 12 months, the premiums are amortized over the coverage period
  • Amounts received under extended service/warranty contracts are included in taxable income when received.

Why is insurance treatment important?

Insurance Company Rules

  • A captive insurance company can set up deductible insurance reserves.
    • Fair and reasonable
    • “Within the actuarial range”
  • Insurance premiums received are “earned” over the contract term.
  • Insurance premiums can generally be paid across borders to fund risk exposures and create local deductions.
  • A properly structured captive insurance arrangement is generally accepted as a method of risk management.

What is insurance for U.S. tax purposes?

  • The term “insurance” is not defined in the statute or the Treasury regulations.
  • Judicial precedent provides the following framework for evaluating whether a scenario is an insurance arrangement (LeGierse):
    • Presence of insurance risk
    • Risk shifting
    • Risk distribution
    • Commonly accepted notions of insurance
  • Self insurance is not currently deductible.
  • Risk shifting was the focus of the courts in response to the IRS’s “Economic Family” doctrine – which has since been discarded.

What is insurance for U.S. tax purposes?

  • Parent/Subsidiary Risks


  • Parent has not shifted its risk to Captive.
    • Balance sheet approach
    • Revenue Ruling 2002-89
  • Premiums paid from Parent to Captive are not deductible.
  • Captive is not considered an insurance company.




What is insurance for U.S. tax purposes?


Brother/Sister Risks


  • Parent has not shifted its risk to Captive.
    • Balance Sheet approach
  • Premiums paid from Parent to Captive are not deductible.


  • Subs generally shift risk to captive.
  • Premiums paid from Subs to Captive are generally deductible provided certain bona fides are satisfied (e.g., premiums are arm’s length, the Captive is adequately capitalized, the Captive is not “propped up”, etc).


  • Generally treated as an insurance company.







What is insurance for U.S. tax purposes?

Third-party Risk Premiums


3rd Party Risks


  • Parent generally shifts its risk to Captive, provided sufficient third-party risk is present.
    • Third-party risk benchmark in industry is > 30% of total premium
  • Premiums paid from Parent to Captive are generally deductible (bona fides are satisfied).


  • Subs generally shift risk to Captive.
  • Premiums paid from Subs to Captive generally deductible (bona fides are satisfied).


  • Generally treated as an insurance company.







Who is responsible for tax?

Entity-level taxation

  • Double taxation on profits of captive (i.e., taxed at captive and again at ultimate owner)
  • Entity subject to tax by activities
    • Engaged in a trade or business in a taxable jurisdiction
    • Permanent Establishment Standard may define level of activities
      • Offshore meetings, day-to-day business, etc.
    • ASC 740-10 (“FIN 48”) consideration
  • Entity subject to tax by election
    • Must conduct an “insurance” business
      • IRC §953(d) Election
      • IRC §953(c)(3)(C) Election – related person insurance income only

Who is responsible for tax?

Shareholder-level taxation

  • Single level of taxation on profits of captive (ie, only at shareholder)
  • Controlled foreign corporation (“CFC”) rules
  • Related Person Insurance Income (“RPII”) CFC rules
  • Passive Foreign Investment Company (“PFIC”) rules
    • N/A if an ‘active’ insurance business
  • Disregarded entity election
    • Captive cannot conduct insurance business given ‘per se’ status

Who is responsible for tax?

“Inadvertent” entity level taxation

  • May have an impact on “healthcare” captives/non-electing captives
  • Tax imposed on foreign corporations which ‘engage’ in a ‘trade or business’ (“ETB”) or have a Permanent Establishment (“PE”)
    • Usually inadvertent for a Bermuda captive
    • May result in a tax accrual
    • ASC 740-10 (“FIN 48”): Company’s potential to have an ETB or PE?
  • Engaged in a U.S. trade or business – not defined
    • Judicially defined concept
      • ‘regular, continuous, substantial’
      • PE standard – applicable only to ‘treaty’ countries; as such, U.S.-Bermuda treaty would need to apply
    • Effectively connected income
      • IRC §864(b) Exception (Securities trading income)

Who is responsible for tax?

“Inadvertent” entity-level taxation (continued)

  • Branch Profits Tax
    • U.S. ETB or PE subject to Branch Profits Tax – 30% or lower if treaty exists
    • Net liability = 54.5%
  • Consider the creation of Tax Operating Guidelines to mitigate risk.

U.S. tax elections

IRC §953(d) Election (“d – Company”)

  • Election to be treated as a US domestic insurance company
    • taxed on worldwide income
  • Requirements of the ‘d’ election
    • Must be ‘insurance’ company for U.S. Federal income tax purposes
      • >50% of business is issuance of (re)insurance or annuity contracts
    • 25% or more shares owned by U.S. Persons (direct/indirect)
    • Revenue Procedure 2003-47
      • Provides guidance/steps for making the election
  • Election irrevocable without consent
  • Cannot re-elect for five years

U.S. tax elections

IRC §953(d) Election – Advantages

  • Exemption from the US federal excise tax on premiums paid to a foreign insurance company
  • Exemption from the withholding tax imposed on certain types of fixed and periodic (“FDAP”) income from US sources
  • Exemption from the “branch profits tax” imposed on certain earnings of foreign corporations that are engaged in a US trade or business
  • Ability to hold meetings and conduct business activities within the US (does not alleviate state regulatory concerns)
  • Ability to join in filing a consolidated US federal income tax return (if applicable)
  • Ability to more freely invest in US property
  • Ability of US shareholders to enjoy the benefit of the dividends-received deduction (“DRD”)

U.S. tax elections

IRC §953(d) Election – Disadvantages

  • Potential for double taxation on distributions made to shareholders
  • Mandatory change of the company’s tax year end to December 31 or the year end of the parent company in consolidation (if applicable)
  • Subject to current taxation on worldwide income with no treaty benefits available
  • Subject to Dual Consolidated Loss Rules

U.S. tax elections

IRC §953(d) Election – Filing requirements

  • 953(d) Election
    • Filed by “extended due date” of tax return
    • Calendar year required (unless a member of a consolidated return)
    • US office and assets test
      • LoC
      • Captive has US assets
      • Consolidated return
  • Annual filings:
    • Form 1120-PC or 1120-L
    • Form 990 for certain “tax exempt” insurance companies
    • Form TD F 90-22.1 if own foreign bank accounts
    • Estimated Tax Payments - quarterly

Shareholder-level taxation

  • U.S. has no authority to tax foreign corporations not engaged in a U.S. trade or business
  • Controlled Foreign Corporation or “CFC” Rules (1962)
    • Two tier test
      • ‘US Shareholder’ defined
        • 10% or more voting stock
      • ‘US Shareholders’ must collectively own >50% vote or value
      • For “Insurance Income” – special >25% Rule replaces standard >50% Rule
    • Deemed distribution provisions
      • Insurance income
      • Foreign personal holding company income (“FPHCI”)
        • Interest, dividends, capital gains, etc.
  • U.S. source premiums subject to Federal Excise Tax (“FET”)
  • Audit/Accounting issues
    • Generally no tax accrual at the CFC-level
    • ASC 740-10– Determination if a US ETB or PE exists

Shareholder-level taxation

  • Related Person Insurance Income, or “RPII” Rules
    • Defined as insuring the US persons who control or is controlled by the ‘insurer’
      • Required RPII / Non-RPII split of management accounts
    • ‘Any’ shareholder replaces 10% voting shareholder for these purposes
    • 25% or more replaces the >25% ownership test
    • De minimis exceptions
      • Less than 20% of gross premiums are RPII
      • Less than 20% vote /value of the company held by related persons
  • U.S. source premiums subject to Federal Excise Tax (“FET”)
  • Audit / Accounting issues
      • Generally no tax accrual at the RPII CFC level
      • ASC 740– Determination if a US trade or business

Shareholder-level taxation

U.S. tax compliance

  • Form 5471 - Information Return of U.S. Persons With Respect to Certain Foreign Corporations
    • Category 2 - U.S. officers and/or director filings
    • Category 3, 4, and/or 5 – U.S. Shareholder filings
    • Filed with U.S. Person’s income tax return
  • Form 926 - Return by a U.S. Transferor of Property to a Foreign Corporation
    • Contributions of property by US persons to a foreign corporation
  • Form 720 – Quarterly Federal Excise Tax Return
    • FET on US risk to certain foreign (re)insurers

Shareholder-level taxation

U.S. tax compliance

  • “Protective” Tax Return (optional)
    • “protects” company’s rights to deductions, losses, and credits if the company is found to have an ETB or PE.
  • Report of Foreign Bank and Financial Accounts (must be e-filed)
    • if a U.S. Shareholder owns more than 50% of the vote or value of the foreign corporation
    • If US officer or director has “signature authority” over foreign financial accounts of the company
  • Form 8938 - Statement of Specified Foreign Financial Assets
    • U.S. persons which own certain foreign financial assets
    • New in 2011
    • Currently only applies to individuals

Healthcare Captives

  • Healthcare organizations are generally considered to be not-for-profit entities; therefore, they are not typically subject to U.S. Federal income tax.
  • As such, a captive subsidiary of a healthcare organization typically attempts to operate in a tax-exempt manner:
    • Insurance income may be considered unrelated business taxable income (“UBTI”) to the healthcare organization’s tax-exempt purpose.
      • Healthcare organization would currently pay US tax on its UBTI.
    • The healthcare captives typically structure their activities in order to NOT be considered an insurance company for US tax purposes.
      • This avoids UBTI and thus tax at the shareholder-level (via CFC rules).
      • The healthcare captive achieves this by insuring a large amount of parent risk in relation to other insurance risks (Rev Rul 2002-89).
        • This would ensure that there is not adequate “brother-sister” or “third party” risk for risk shifting and risk distribution to occur.
  • U.S. source premiums are not subject to Federal Excise Tax (“FET”) if not meeting the definition of ‘insurance’ for US tax purposes.
    • Reinsurance premiums ceded by captive are subject to FET

U.S. Federal Excise Tax (“FET”)

  • IRC §§ 4371- 4373
    • 4% on direct premiums
    • 1% on life, annuity, health, and reinsurance
    • “tax” maybe assessed on both payor and payee
  • Assessed on premiums ‘paid’
  • Compliance
    • Form 720 - filed quarterly
  • Cascading theory

Income Tax Provision

  • Companies that require a Tax Provision Review:
    • Offshore insurance companies that have made an IRC§953(d) election or an IRC§953(c)(3)(C) election
    • Offshore company which conducts a US ETB or has a PE
  • Requirements will depend upon the form of the financial statements
      • U.S. GAAP
      • Bermuda statutory
      • IAS
      • Other

Tax Information Exchange Agreement


  • What is a TIEA?
    • Bilateral agreements to provide assistance in tax matters through an exchange of information to assist 2 countries in administering, enforcing and collecting their respective taxes
  • Bermuda government currently has 23 TIEA’s to date
  • Canada-Bermuda TIEA signed on June 14, 2010
    • Tax Benefits
      • Ability to repatriate earnings on a tax-free basis to a Canadian parent
  • Who might benefit?
    • Canadian multinational companies with profitable non-Canadian subsidiaries seeking to self-insure existing risks.

Foreign Account Tax Compliance Act

(“FATCA”) – in brief

  • FATCA treats (re)insurance premiums as ‘withholdable payments’; as such, subject to 30% withholding unless FATCA compliant
  • Effective July 1, 2014
  • 953(d) Electing Companies
    • Treated as U.S. persons and thus U.S. w/h agents
    • Annual filings
      • Form 1042
      • Form 8966
  • Bermuda P&C insurance/reinsurance companies (no elections)
      • Typically Passive NFFE’s
      • Must complete Form W-8BEN-E to avoid w/h
      • Disclosure of U.S. owners may be required