12 May 2015Asset management analysis

CICA responds to IRS, requests public hearing

The Captive Insurance Companies Association (CICA), the domicile neutral trade association representing the captive insurance industry, has submitted a response to the Internal Revenue Service (IRS) regarding RIN 1545-BM69 – Exception from Passive Income for Certain Foreign Companies.

The response objects to the proposed definition of “active conduct”, and requests a public hearing.

The proposed regulation was issued by the IRS in late-April.

“As currently drafted, the language would not allow an insurance company to operate through the utilisation of independent contractors or the officers and employees of subsidiaries, which is contrary to the manner in which thousands of captive insurers operate and to current IRS practice,” said Dennis Harwick, CICA president.

CICA also questioned the need for the proposed regulation in light of the existing statutory authority to address the level of capital necessary to conduct an insurance business, citing existing provisions that require that more than half the insurance company’s business be from insurance and reinsurance.

The CICA made the submission pursuant to the invitation for comments in the above referenced matter published in the Federal Register on April 24, 2015. In addition, CICA is requesting a public hearing in accordance with the invitation to request a public hearing.

The CICA said that after consulting with a number of tax experts, it believes that few, if any, of CICA’s members will be directly affected if these regulations are finalized in the form proposed.

“However, CICA is concerned about the language in the proposed regulation attempting to define ‘active conduct’ of an insurance business that excludes the officers and employees of related entities and independent contractors.

“The vast majority of our member insurance companies operate through the use of independent contractors to provide support services to their insurance business. To adopt the proposed regulation as currently drafted would impose an inappropriate standard that, if applied more broadly in the future, would be unfair and completely contrary to the manner in which thousands of captive insurers operate.

“Moreover, the requirement that the insurance company have employees is contrary to current IRS practice,” the trade body said.