A US tax court’s ruling that a captive’s deductible premiums are legitimate because real risk transfer occurred has some captive insurance company principals breathing a sigh of relief.
The US Tax Court ruled that payments to Rent-a-Center’s wholly owned captive, located in Bermuda, were deductible under section as an insurance expense. The court ruled the captive was formed for a valid business purpose and the company shifted risk to the captive.
The Tax Court majority found that the Bermuda-based captive insurance company was a genuine insurance company because it was created for significant, non-tax reasons and that there was no impermissible circular flow of funds.
Thomas Stokes, managing principal and US consulting practice leader for JLT Towner, said: “The IRS argued that the captive was created solely to create federal tax benefits, which wasn’t the case. The court ruled substance over form mattered. This is positive news for captives.”
“If the intent is there to develop and operate the captive the way an insurance company should, captive owners can feel a bit more confident that the IRS won’t challenge their captives’ legitimacy based on technicalities.”
