HAVE WE SEEN
AN INCREASE
OR REGRESSION
IN LICENSING?
During the first nine months
of 2018, eighteen new class
B licenses have been granted
and almost as many have been
surrendered. Both figures are
trending lower when compared
to 2017 and 2016. How much of
this is attributable to tax reform
no one really knows, but I suspect
certain structures, taxable pure
captives for example, are on the
decline due to the base erosion
anti-abuse tax (“BEAT”) provisions
that were recently enacted. BEAT
came into law in an effort to curb
perceived abuse by multinational
corporations operating within the
US that were attempting to shift
profits to overseas lower taxed
jurisdictions. The BEAT applies
when US corporations are making
deductible payments to offshore
affiliated entities. The deductibility
of the payments are effectively
subjected to a computed
limitation and a minimum tax is
assessed on the US Corporation.
The tax can be quite punitive and
may lead a multi-national group
to make a significant change to
the captive structure by either
re-domesticating to an onshore
domicile or making an election
under IRC 953(d) to be taxed as a
US corporation.
HAS THERE
BEEN MUCH
OF AN IMPACT
TO THE TAXEXEMPT
OWNED
CAPTIVE
INDUSTRY?
As we all know, Cayman is wellknown
for being the domicile of
choice for captives owned by taxexempt
groups. While tax reform
did not bring about any new laws
aimed directly at these structures,
one new law did indirectly make
an impact. Tax-exempt groups,
in addition to normal operations,
often operate in areas unrelated
to their charter. These specific
profits are generally subject to
taxation as if they were operated
by a for profit entity. Previously,
a tax-exempt could offset
profits from one unrelated area
with losses from another. This
is no longer permitted as each
unrelated business must stand
on its own from a tax liability
perspective. How does this impact
our captive industry? While
almost all captives owned by taxexempt
groups are structured as
non-insurance for tax purposes,
many provide coverage to either
employed physicians or taxable
related party entities. These
transactions are often considered
insurance for tax purposes and
require the tax-exempt entity to
report unrelated business taxable
income. This may cause a surprise
to tax-exempts in 2018 when their
Form 990-T is filed.
HAS THERE
BEEN AN
INCREASE IN
IRC §953(D)
ELECTIONS?
When US tax reform was
passed, many people believed
we would see an increase in
companies electing to be taxed
as U.S. Corporations under IRC
§953(d). After much modeling
and numerous discussions with
industry professionals, I did not
see many companies make the
election largely because of tax
reform and the new 21% corporate
income tax rate. Significant
skepticism remains as to whether
or not the 21% rate will hold for
the long term. If the rate does rise
in the near future, most offshore
captive owners will be thankful
they did not elect to be taxed as
a US corporation. The controlled
foreign corporation (“CFC”), single
tax system route remains the
popular choice amongst captive
owners.
CAPTIVE INSIGHT
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