US captives are switching domiciles to avoid self-procurement taxes
With around 35 to 40 states having now passed some form of captive legislation, more captives are redomiciling to their home state, according to Bill Mourelatos, director of Aon Insurance Managers (Vermont).
Mourelatos spoke to Captive International at the Vermont Captive Insurance Association’s (VCIA) annual conference, which has been taking place in Burlington, Vermont, this week.
“What’s happening now is some captives domiciled in Vermont are now redomiciling to their home state,” he said.
The main reason for this, according to Mourelatos, is self-procurement tax. Certain states are assessing whether some firms’ parent companies have captives in other states, and aggressively going after those parent companies for tax.
“It’s got a lot of captive owners worried whether they’re going to be identified and whether they’re going to have this exposure or not,” he added.
Mourelatos explained: “If you're not using a front and you're writing directly to your captive insurance company, there's an exposure of taxes from your home state. Texas does not allow non-regulated entities to write Texas risks. So if a Texas company has a captive in Vermont writing Texas risk, that regulator could theoretically tax that premium. So what's happening is they're redomesticating to their home state to avoid that tax.”
Michael Scott, vice president at Archer Daniels Midland (ADM) suggested one of the problems is that states are going to interpret their own self-procurement tax.
Scott commented: “ADM for about six months carried out a heavy lobbying effort with legislature to try to amend the bill to exempt captives from the new law. It passed the Illinois senate unanimously and then died in the house, but that’s typical of Illinois.”
In 2015, ADM formed an Illinois captive with the plan to write all the directorate policies of the parent company into the Illinois captive and then reinsure those to the Vermont captive.
Scott continued: “There were significant savings because the self-procurement tax was 5 percent, and the captive tax is .5 percent, so it’s a 4.5 savings on premiums.”