17 May 2018Accounting & tax analysis

Vermont introduces onshore reinsurance alternative in wake of tax reform

The State of Vermont has passed new legislation offering an onshore affiliated reinsurance alternative to insurers affected by the recent imposition of the Base Erosion Anti-Abuse Tax (BEAT) on reinsurance ceded to offshore affiliates.

Signed by Vermont Governor Phil Scott, the law is aimed as creating more favourable reinsurance alternatives for US companies conducting business in offshore jurisdictions that are now faced with a substantial tax burden from BEAT provisions included in the Trump administration's tax reforms.

The Tax Cuts and Jobs Act enacts significant changes for controlled foreign corporations (CFCs) and passive foreign investment companies (PFICs), and it introduces the BEAT. There is now a minimum tax on multinational corporations that have at least $500 million of annual US gross receipts over a three-year lookback period and a base erosion percentage of at least 3 percent for the taxable year.

Fitch Ratings' Bermuda 2018 Market Update had suggested the combination of the cut in the US corporate tax to 21 percent (from 35 percent) along with the BEAT will "significantly reduce the long-standing tax advantage of Bermudian re/insurer over those in the US."

Vermont's deputy commissioner of captive insurance David Provost says the state has been considering this legislation for some time, but the imposition of BEAT taxes on foreign reinsurance "made the timing critical".

Provost explained that the companies are akin to a hybrid between captives and traditional insurance.

"Like captives, they will be limited to reinsurance of affiliates, but they will be regulated in accordance with NAIC accreditation standards like a commercial reinsurer would be," said Provost.

Governor Scott commented: “I'm proud that we were able to work quickly and collaboratively to pass a bill that creates a viable alternative for companies conducting these types of transactions while also maintaining our high regulatory standards and providing a fiscal benefit to the state. This bill represents our state’s ability to adapt quickly to regulatory changes in support of this industry.

“Vermont’s financial services industry is highly sophisticated, and our team of captive insurance professionals is well-equipped to regulate these types of complex transactions.”

Click here to take part in our reader survey and help us keep on improving our website and magazines.