If you have heard about offshore captive insurance, the concept might seem complex or come off as risky to your clients. After all, laws outside of the United States are different. Or you’re concerned about anything offshore due to potential IRS scrutiny. It can make offshore captives sound risky or unappealing.
At Captive Coalition, we have worked with independent agents with similar concerns. We understand how captive insurers work, whether they operate on or offshore.
This article will cover the basics of offshore captives, why they exist, and what the IRS thinks of them. Key benefits and drawbacks of captives will also be broken down. That way, you can confidently talk to your clients about offshore captives.
What Does It Mean to Belong to an Offshore Captive Insurer?
Being part of an offshore captive means joining a well-established network of experts. These domiciles offer significant experience, flexibility, and a support system that has been built up over 50 years. Everything is done by the book. Strong networks are in place to ensure compliance with U.S. and offshore regulations is maintained.
Whether a captive is owned on or offshore, you might wonder how your client would do with a captive insurer. Use the captive assessment tool to get those results.
How Does the IRS View Offshore Captives?
When it comes to taxation, the IRS has three methods to approach offshore captives:
- Taxing the Captive Itself: A non-U.S. corporation that doesn’t do business in the U.S. isn’t automatically subject to U.S. corporate taxes. However, it will face U.S. corporate tax if it does business in the U.S. or elects to be taxed as a U.S. corporation (Under section 953(d)).
- Imposing an Excise Tax on Premiums: Premiums paid to an offshore captive might be subject to U.S. excise taxes unless the captive does business in the U.S. or has elected 953(d) status. Without this election, premiums are taxed at 4% for property and casualty insurance and 1% for life, sickness, accident policies, or annuities.
- Taxing the Captive Owners: If the captive doesn’t do business in the U.S. and hasn’t elected 953(d) status, there might still be an excise tax on premiums. The owners could be taxed depending on specific circumstances. Importantly, using a captive primarily for tax savings can attract IRS scrutiny. A captive insurer’s primary purpose should always be to provide legitimate insurance coverage.
What the Heck is the 953(d) election?
This means an offshore captive can elect to be treated as a U.S. corporation for tax purposes under section 953(d). This means the captive will pay U.S. corporate taxes but won't be subject to the branch profits tax or excise tax on premiums. The decision to make this election is irrevocable and requires IRS approval, meaning the captive is committed to meeting U.S. tax obligations.
Benefits of Offshore Captives
For many businesses, offshore captives are attractive because of the experience and regulatory environment found in these domiciles. Offshore locations like Bermuda have been leaders in developing captive structures.
Key Benefits of Offshore Captive Insurers
- Expertise and Experience: Offshore domiciles have decades of experience, making them reliable for establishing captives.
- Regulatory Flexibility: These domiciles offer more flexible regulations, which can be beneficial for businesses with unique insurance needs.
- Cost Efficiency: The costs associated with running an offshore captive can often be lower due to favorable regulatory environments.
Drawbacks of Offshore Captives
While offshore captives have more than their fair share of benefits, there are drawbacks that need to be considered:
- Dual Compliance: Businesses must comply with both U.S. regulations and those of the offshore domicile, which can add complexity.
- Mandatory Meetings: Offshore captives often require their board of directors to meet in the domicile country at least once a year. This can be seen as a hassle or an excuse for a trip!
Is a Captive Insurer a Good Option for Your Clients?
Offshore captives are nothing to be concerned about so long as your clients join a captive for the right reasons. They face the same regulations as though the captive was owned onshore. Either way, like any other captive, they also face their own benefits and drawbacks.
If you are considering a captive arrangement for your best clients, you need to read our article on the financial advantages and disadvantages of captive insurers. That way, you can weigh their pros and cons to see if they are viable for your clients' needs.
If you have questions about captive insurers or want a consultation, schedule a call with Captive Coalition to speak with one of our insurance advisors.
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