Offshore Captive Insurance Company Formation

Research shows that about 80% of the Standard and Poor 500 (S&P 500) companies own one or more captive insurance companies. Offshore captive insurance is the main source of insurance for both large and small companies. U.S. Internal Revenue Code Section 831(b) specifically allows for a particular type of insurance where the insurance company is owned by the shareholders or principles of the insured company. The insured, related company which pays the premiums into the plan is allowed a tax deduction for the premiums as an ordinary and necessary business expense.

Tax Benefits
The statutory captive insurance company will elect to be classified as a domestic insurance company as indicated under IRC Section 953(d). It will, therefore, file US tax returns annually. However, premium income up to the first $1.2 million is exempt from taxation. So, the company paying the premiums receives a tax deduction, and the captive insurance company receiving the premiums receives the first $1.2 million tax-free. In the following callendar year, another $1.2 million can be contributed, for a total of $2.4 millon over two years, $3.6 million in premiums are tax deductible over three years, etc.

Definition
A captive is an insurance company that insures the risk of its parent company. Laymen may refer to the arrangement as self-insuring, alternative rsk transfer or alternative insurance.

Additional Benefits
Financial havens with strong insurance statutes are the locations where most companies are formed. In addition to the tax benefits describe above there are several additional convincing reasons why captive offshore insuring vehicle should be considered. One is able to "self insure" to an extent not available otherwise. The cost of insurance can be significantly reduced. Plus, risk management is enhanced. Moreover, if a standard policy is not available or extraordinarily expensive, the plan may be the only viable option. Professional malpractice, pollution and hazardous materials as well as catastrophic risk are excellent examples of rates-gone-awry. US insuring companies frequently raise rates or deny coverage without warning. Whereas, owning your own offshore captive company can give your plan longstanding solidity and direct access to reinsurance markets.

Domestic vs. Offshore
There are some US states and at least one Canadian province with statutes on the books that enable domestic captives. However, there are particularly attractive benefits to going offshore. These include lower costs, possible tax benefits and increased flexibility.

Investing Premiums
The money inside the insurance company is, in turn, invested. One popular and stable choice is to invest the money with a Swiss bank account that has a money management division. Whereas the premiums are deductible and the company receives premiums tax-free, naturally, income that is generated from the investment activity is taxed annually.

Types
A captive is a wholly owned subsidiary of a company that is not primarily in the insurance industry. Its main function is to insure some or all of the risk of its parent company. As the industry has grown those involved have sought new methods of enhancing the captive structure to create means by which a variety of industries can benefit. Here are a number of different structures a are being used;

• Single Parent Captives - Only underwrite the risk of related group companies.
• Diversified Captives - Underwrite unrelated risk in addition to related group companies.
• Association Captives - Underwrite the risk of members of a specific industry-type or trade-association. Medical malpractice is often insured in this fashion.
• Rent-A-Captives - Companies that offer access to captive structures without needing to establish one’s own insurance company. The participant pays for the use of the company and needs to provide collateral so that the rent-a-captive is not exposed to substantial risk experienced by the participant.
• Special Purpose Vehicles (SPV's) - Used to secure risk. These are reinsurance companies that execute contracts with their parent company and yield the risk to risk the capital markets. This is typically accomplished by a bond issue.
• Agency Captives - Established by insurance agents or brokers to enable them to participate only in low-risk activities under their control.

Requirements
To comply with IRS requirements, the captive insurance company premiums need to exceed investment income. Additionally, the policies that the captive issues need to comply with the "risk distribution" and "risk shifting" requirements. In order to comply, the company can obtain reinsurance. This is done in the international reinsurance markets whereby "pooling" arrangements are utilized. This can successfully minimize the costs and the help to protect against to claims by unrelated companies. The finer points and investment required to establish the structures depend on the needs and desired outcomes.

Accounting
Because this technique is common among many well-know companies, there are a number of highly regarded accounting firms that deal with the necessary tax and reporting duties for statutory captives.

Captive Insurance Company Not a Listed Transaction

The IRS has issued Notice 2004-65 which has successfully de-listed the Section 831(b) statutory captive insurance company as a tax shelter. So, it is not a listed transaction and the IRS does not require special notification that one is participating in such a program. IRS Commissioner Mark. W. Everson has states, "Based on disclosures from taxpayers and examination of tax returns, we have determined problems associated with these transactions are no as prevalent as initially believed. Accordingly we are no longer classifying them as listed transactions."

For More Information
Offshore captive insurance offers some significant benefits to many companies, including small to large Fortune 500 firms. Please feel free to contact us at 800-830-1055 or +1 661-253-3303 from 7:00 am to 5:00 pm US Pacific Time.

This purpose of this page is to give a general overview of the subject matter. It involves complex legal and tax planning knowledge. It is not intended to give nor should it be considered tax or legal advice.