Magazine article Risk Management

Changes Ahead for Captives and Reinsurers

Magazine article Risk Management

Changes Ahead for Captives and Reinsurers

Article excerpt

CAPTIVES IN Bermuda beware! No, it's not another hurricane. It's the Companies Amendment Act of 1992. Enacted on July 1, 1992 in Bermuda, the Companies Amendment Act eliminates the qualifying share provision affecting directors and results in a number of technical changes that may affect captive insurance companies organized in Bermuda. Furthermore, those companies involved with reinsurance should be aware of changes under consideration in the United States concerning U.S. excise tax provisions.

Prior to Bermuda's recent amendment act, all directors of companies that issue shares (as distinguished from mutual companies) were required to hold a "qualifying share." Since these directors typically did not contribute capital to the company, they would be assigned a share by a shareholder that did contribute capital.

So that directors did not profit from increases in share value, they generally executed "declarations of beneficial interest" or "declarations of trust" in favor of the assigning shareholder. But such share ownership also raised questions under Section 6046 of the U.S. Internal Revenue Code (IRC) of 1986, as amended, as to whether such individuals needed to report the consequences of this arrangement on their personal income tax returns by filing Form 5471, Schedule 1, reporting subpart F income.

By eliminating the qualifying share provision, the amendment act allows a company's structure to be simplified and the filing requirement clarified. Note, however, that IRC sec. 6046 (a) (1) requires directors to file Form 5471, Part I of Schedule 0 to report share ownership. Notwithstanding, they need not file Schedule 1 to report income. Mutual companies can also simplify these issues as it would appear that only provisional directors, insureds who are members and "any person who provides part of the funds necessary to establish or maintain the reserve fund of the [mutual] company" need be members of the mutual company.

Because directors apparently no longer need to appear on the shareholder/member register, a separate register of directors and officers must be maintained. The only officers that need be listed, however, are president, vice president and secretary (including assistant and deputy secretaries).

Excise Tax Provisions

ON JUNE 16, 1992, an amendment to excise tax provisions of the Internal Revenue Code of 1986, as amended, was attached to an energy bill recently passed by both houses of the U.S. Congress. If enacted as is, the bill will affect reinsurance placed both directly with companies resident offshore as well as that placed indirectly through a country with a substantial tax rate.

Under the amendment, the federal excise tax (FET) is affected two ways. First, the rate of FET on reinsurance premiums paid to a foreign reinsurer would be raised from 1 percent to 4 percent unless the insurance income (including investment income) relating to the policy of reinsurance is subject to income tax in the foreign jurisdiction at a rate that is "substantial" in relation to the tax imposed by the United States on similar premiums received by U.S. reinsurers, and the risk is not reinsured with a resident of a foreign country not subject to tax at a "substantial" rate.

A rate will be considered substantial here if generally imposed at 50 percent of the effective U.S. rate. Questions arise, however, as to how the foreign country's tax rate will be calculated (e. …

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