Non-831(b) small captive solutions gain traction in Puerto Rico

While captives that make the 831(b) election have come under increased scrutiny over the past few years, there are other small captive solutions that are gaining traction, which is especially the case in Puerto Rico, according to David Kirkup, chief operating officer and chief financial officer of Captive Alternatives.

“There are reputedly more than five hundred 831(b) captives under audit, and, in most cases, premium deductibility is being automatically denied without regard to the facts and structure of the captive model. In short, we see the 831(b) model as under severe stress for the foreseeable future,” said Kirkup.

Recent tax court cases such as Avrahami and Reserve Mechanical - along with upcoming cases - will likely embolden the IRS to continue to aggressively look at captives.

Over the last few years, Puerto Rico has been very active in the small captives space, both for 831(b)s and non-831(b)s.

At the end of 2017 there were nearly 500 micro-captives established in Puerto Rico with premiums approaching $1 billion.

The preferred structure in Puerto Rico is a segregated assets plan, which allows international insurers covering risk outside the country the ability to create new entities and do it efficiently and affordably, Kirkup said.

“With offshore domiciles facing lots of challenges such as new alternative minimum taxes, European black and grey lists, and ever more stringent money laundering regulations, Puerto Rico emerges as a US Federal law domicile with extremely strong regulations,” said Kirkup.

As a US territory, Puerto Rico is under US federal law and banking regulations, and is a member of the National Association of Insurance Commissioners.

“One unique aspect of Puerto Rico’s tax law is that captives domiciled in Puerto Rico can be taxed under the local tax authority which is independent of the IRS jurisdiction. This gives flexibility to the captive model that is unique to any other domicile,” added Kirkup.

“Captive Alternatives has developed a strong non-831(b) model that conforms with IRS Safe Harbor rules within this supportive structure, and is seeing positive signs of growth as the small captive business has reached a plateau.”

Kirkup also sees opportunities with large captives in Puerto Rico, who are concerned about new alternative minimum taxes like BEAT and GILTI in offshore jurisdictions, as well European blacklists and looking for a new, well-regulated and reputable domicile.