HOW ARE
COMPANIES
DEALING
WITH THE
NEW PASSIVE
FOREIGN
INVESTMENT
COMPANY
RULES?
PFIC rules have gone through
a significant change to the
exception that allows for
qualifying insurance corporations
to be excluded from the definition.
Previously the exception was
very subjective as the tax code
specified that the corporation
must be predominantly engaged
in an insurance business and
would be subject to tax as an
insurance company if it were
a domestic corporation. New
law adds a more formal and
structured computation to the
definition of a qualifying insurance
corporation. Applicable Insurance
Liabilities must equal more than
25% of total assets. This has had
a dramatic impact on NCFC’s
as many retain significant asset
holdings as earnings have been
deferred over the years and were
not yet subject to tax. Historically,
assets were taxed when
distributed to shareholders. This
piece of the tax legislation was
an attempt to force companies
to repatriate assets that were
earned from previously tax
deferred income.
Over the past year, we have
assisted several companies and
had numerous conversations in
this area as PFIC classification
is generally something most
companies, and its shareholders,
prefer to avoid. On its face,
the calculation is quite simple,
applicable insurance liabilities
divided by total assets must
equal more than 25%. However,
when you begin to peel the layers
off and dissect the language of
the IRC, you realise nothing can
be that simple. First, what does
applicable insurance liabilities
mean? Second, on what basis
are total assets determined?
While the tax code does provide
definitions for both these terms, it
is clear that additional guidance
is needed from the Treasury
Department (the ”Treasury”)
immediately in order to give
businesses the opportunity to
plan and act accordingly. For
example, if a Company does
plan to distribute assets in order
to meet the 25% test, first it
must know exactly how the test
is calculated so it knows exactly
how much of its assets must be
distributed. Planning and timing
surrounding the test is also tricky
as many companies do not know
what their reserve liabilities are
until 30-60 days after year end.
Additionally, if a company holds
private investments, determining
fair market value can take
even longer. Does the Treasury
understand these complications
and if so, will they consider them
when drafting Regulations?
The industry is hopeful these
Regulations will come out in
proposed form before the end
of November. While Proposed
Regulations are not final and may
change, they provide a sense of
where the law is headed and are
also available to be commented
on by accountants and lawyers.
HOW HAS
DOWNWARD
ATTRIBUTION
IMPACTED
INSURANCE
CORPORATIONS
OPERATING
OFFSHORE?
Downward attribution is a term
of art that effectively means
foreign corporation subsidiaries
of a foreign holding company are
deemed to be owned by any US
subsidiaries of the foreign holding
company. If a foreign subsidiary
is deemed to be owned by a US
corporation then it is a CFC for US
tax purposes, although only 10%
direct or indirect US shareholders
of the foreign subsidiaries would
be required to report Subpart
F income. These very complex
rules had a significant impact
on certain US shareholders
during the 2017 tax year. While
many US shareholders in
foreign corporations were busy
calculating gain and the so called
toll tax on repatriated earnings, a
subtle change in the law meant
for some, that 2017 earnings
and profits would be considered
Subpart F income, rather than
repatriated earnings. This was
significant as the repatriated
earnings were eligible for a
reduced tax rate. While this
generally would not directly
impact a captive, it did impact
corporate groups operating both
insurance and non-insurance
businesses offshore.
HOW HAS
TAX REFORM
IMPACTED
DEFERRED
TAXES?
The main impact to the deferred
tax asset/liability was the
decrease in statutory tax rate
from 34/35% down to 21%. This
caused a significant adjustment
at year end as the asset/liability
needed to be revalued at 21%.
Many companies had a reduction
in capital as a result of this change.
Companies accounting for
investments on the available for
sale method faced an awkward
situation as ASC 740 did not allow
CAPTIVE INSIGHT
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