New York tax reform could empty captive companies’ wallets, if it goes ahead as planned.
In January, New York Governor Andrew Cuomo proposed broad corporate tax reform in his budget bill by way of a shift from a separate entity reporting regime, to a full unitary combined group reporting regime.
As part of this combined reporting methodology, the proposal would include captive insurance companies in the combined group—a stark departure from the present law.
Currently, New York tax law imposes tax on general business corporations under Article 9-A.
The definition of a “general business corporation” does not include captives, unless they are stuffed—ie, if fifty percent or less of the company’s gross receipts for the taxable year consists of premiums. If this is the case, then the overcapitalised captive is treated like a general business corporation.
“New York enacted this provision based on a perception that the state was losing revenue because some captive insurance companies earned significant non-premium revenues,” said a legal alert from Sutherland Asbill & Brennan LLP.
There is also a law that taxes insurance corporations, under Article 33. Under the new proposal, all combinable captive insurance companies would be excluded from Article 33, and included in an Article 9-A combined return: meaning that it is not just stuffed captives that would be affected by higher taxes.
The law firm added that, if enacted into law, this captive insurance combination provision would likely result in a significant tax increase.
