13 March 2019

Extra-domicile tax post-Microsoft poses challenges for captive industry

Self-procurement taxes are by no means a new thing, but there may be a lot more attention in the captive insurance industry due to aggressive enforcement actions, most notably involving Washington State and Microsoft’s captive, Cypress Insurance Company.

This is according to a panel at the CICA conference entitled ‘Addressing Extra-Domicile Regulatory and Premium Tax Risks’. Speakers included: Joe Holahan, attorney at Morris, Manning & Martin; Pete Kranz, managing director, captive group leader at Beecher Carlson; and Mikhail Raybshteyn, Americas captive services deputy leader, EY Global Captive Network.

Issued on May 9, 2018, the Washington Insurance Commissioner had alleged that Microsoft had been writing direct insurance policies through its captive, and was noncompliant with surplus line laws.

The panel suggested that many states are now re-evaluating their posture towards the taxes, while others are taking a more business-friendly stance towards captives.

North Carolina is one such state that had looked at legislation to exempt captives formed in other US domiciles from all North Carolina state taxes, for example.

“I don’t see a lot of evidence that states that have not traditionally been aggressive about this are getting more aggressive. We don’t know what the future might hold. There are a few states that have paid more attention to this than others, and I don't think that is going to change. But I haven’t got reports of other states getting into it,” said Holahan.

“Then there are a few states like North Carolina, Ohio, and Georgia, who have said they aren’t going to assess the tax. They want to be business friendly. Ohio is a state that is trying to build up a high-tech industry, replacing the steel and heavy manufacturing that has gone by. You can see why a state like that would take that approach.”

Dan Towle, the president of CICA, said the concern of regulatory overreach by home state regulators on captives domiciled in other jurisdictions is potentially the biggest threat to that the US industry may have in 2019.