Tax advantages of international captives may decrease under US tax reform
Trump tax cuts to impact captives; "crucial" to get tax advice
Although certain tax benefits may be reduced for parent organisations, all US captive insurance companies will benefit from reduced tax rates from the Tax Cuts and Jobs Act, according to captive manager CIC Services.
In a blog post on its website, the captive manager highlighted that captives are C Corporations and are taxed separately from their owners.
With regard to the new tax law, this would mean that 831(b) captives would still be taxed zero percent on their underwriting profits, however they now have the added benefit of having their investment income taxed at the lower 21 percent corporate rate – compared with up to 35 percent previously.
CIC Services noted that large captives would benefit two-fold, with tax on underwriting profits reducing from up to 35 percent down to 21 percent, and also their tax on investment income is reduced to 21 percent.
The tax benefits of captives however may be reduced as the legislation decreases parent company taxation for most businesses. CIC Services suggested this lower benefit will vary in impact from businesses to business and is "best understood as a potential reduction in the tax arbitrage between the parent company (insured) and the captive (insurer)."
One such example is that the tax benefit to most C Corporations paying premiums to an 831(b) election will be reduced.
"However, C Corporation profits are subject to double taxation when dividends are paid out to owners/shareholders, so the tax benefits of 831(b) captives combined with the right captive exit strategies are still substantial," CIC Services added.
CIC also noted that the highest tax bracket for owners of pass-through entities (S Corporations, limited liability companies, partnerships etc.) was 39.6 percent in 2017, and will now be 37 percent for most owners in 2018.
As a result, an 831(b) election that would have saved 39.6 percent in taxes in 2017 would only save 37 percent in 2018, or 29.6 percent for certain pass-through entities (manufacturing and businesses that sell durable products) which get to deduce 20 percent of their income.
CIC Services emphasised that the risk management benefits, insurance policies and coverages provided by the captive are unaffected by the new tax law.
"For most businesses, the benefits of improved risk management, improved asset protection and tax savings that a captive provides will not be sufficiently negated. Captives remain a powerful and logical choice," said CIC Services.
Captive International previously reported that the tax advantage of international captives may decreases as a result of the legislation, which an AM Best research analyst suggested may lead to decreased usage.
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CIC Services, Captive management, Legislation, Tax, Captives, 831(b), North America