Solvency II, infrastructure costs, base erosion and profit sharing (BEPS), and Brexit, are just some of the challenges that European captives are currently facing, according to Ciaran Healy, director of consulting for the global captive practice at Willis.
Healy explained at the European Captive Forum that the instability driven by these recent events has seen a migration of captives to offshore domiciles to avoid Solvency II, while others have moved onshore in order to embrace the directive. He suggested that captives have left European onshore domiciles for the likes of Guernsey or even the US.
Other notable challenges have included captives considering their substance and location rationale in reaction to BEPS, and the potential implications of the UK’s exit from the EU.
Healy said: “The result of all this is that there is already some relocation occurring with many more considering a domicile review. The overall landscape in Europe is going to change. How dramatic that change is going to be we will have to see, but I predict there will be movement.”
In his presentation, Healy revealed that 94 percent of captive entities in Europe are located in ‘traditional’ captive domiciles. Some 63 percent in Europe are not subject to Solvency II.
Thirty-six percent of captive entities in Europe are cell captives, while 11 percent of captive entities in Europe are located in the same jurisdiction as their parent headquarters. He noted that his last point took Sweden and Switzerland into consideration. If they were removed, the 11 percent figure could drop to approximately 4 percent.
With not many captives are located in the same jurisdiction as their parents, Healy pointed out both advantages and disadvantages of home-based captives.
An advantage is that the captive will be aligned with BEPS expectations. Healy explained that the substance and economic rationale for location are addressed. Also, the captive is embedded to a greater extent within group, allowing for increased visibility of the captive internally.
But a negative implication is that it requires the captive to operate in a self-managed or semi self-managed approach, meaning less outsourcing availability. Healy also explained that it could mean a lack of familiarity with the captive business model from regulators, which could consume more time and potentially result in more onerous compliance requirements.
Reasons for captives to steer clear of their parents’ domiciles include the fact that captive expertise still focuses around traditional domiciles, which may not necessarily be where the parent is based.
Healy also pointed out that if the home location does not have captive legislation in place, there could be a big risk associated with being the first to domicile a captive in that location.
He said: “The decision to establish in a non-traditional captive domicile would require a material change in captive strategy, including investment in time, people, processes and systems. Service providers will also need to start thinking about this, as well as everyone in the whole captive lifecycle.”
“This trend can be described as a green shoot. There are only two captives that I know that have moved from a traditional captive domicile to their home domicile. I don’t think there will be any drastic changes but the figures may change a little bit.”
Healy concluded: “BEPS will impact on captives, it will be naive to think it won't affect us. Rightly or wrongly, other offshore locations will be affected. There are equal opportunities for Guernsey and the Isle of Man in the cell captive business. Guernsey is by far the largest domicile in Europe and those captives by large are there to stay.”
