8 September 2018Analysis

Vermont’s ARCs will help firms avoid BEAT and enhance domicile: AM Best

Vermont’s recently introduced captive structures, affiliated reinsurance companies (ARCs), will likely enhance the domicile’s standing in the captive industry, according to an AM Best briefing.

The briefing, ‘Vermont Captive Legislation Targeted at Companies Looking to Avoid the BEAT’, states that the captive is being marketed as an alternative for US companies that have been reinsuring to an offshore affiliated - typically Bermuda or the Cayman Islands, to avoid US corporate taxes.

Vermont’s regulators have said that the legislation was introduced in response to US tax reform, which left companies with an additional burden to the so-called BEAT tax. Insurance ceded to third-party reinsurers was previously not subject to the new tax.

Affiliated reinsurance companies will be subject to many of the laws and regulations under the NAIC, but will be licensed and regulated by the Vermont Captive Insurance Division.

Although there have been no licenses yet, a number of companies have expressed interest, as AM Best noted a number of large US insurers maintain a relationship with Vermont.

AM Best said the legislation appears to give broad discretion to the state’s insurance regulator to permit flexibility in capital requirements and investments.

Other advantages for insurers would include a $200,000 cap on state premium taxes, as well as the ability to avoid the 1 percent excise tax, or in some cases, 4 percent excise tax, imposed on premiums paid to overseas insurers—although foreign insurers making a Section 953(d) election also can avoid the excise tax.

Another factor favouring the new Vermont captive is that any net operating losses from offshore affiliates that make the Section 953(d) election under the US tax code are generally unavailable to offset income of other members of the same consolidated group. AM Best presumes this tax disadvantage would not exist for affiliated reinsurance companies.