A proposed tax reform in New York could result in a significant tax increase for captives, according to Sutherland Asbill & Brennan LLP.
The law firm sent an alert to its clients following New York governor Andrew Cuomo’s corporate tax reform proposals, which were issued in January as a part of his budget for 2014 to 2015.
“The most significant proposal is 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 current New York tax law,” commented the firm in its alert.
Currently, an overcapitalised captive, which is deemed as such if 50 percent or less of its gross receipts for the taxable year consist of premiums, is treated as a general business corporation under New York law and taxed accordingly.
As a result, it must be included on a general business corporation tax return, so that the state can take a slice of non-premium revenue.
But this provision created a loophole, according to the law firm. “Because the captive insurance company is included in a combined group, premium payments (and other inter-corporate transactions) from members of the group are eliminated. Accordingly, more specifically, premium deductions are eliminated for insureds, and investment income is picked up on the combined return.”
Governor Cuomo wants to close this loophole. Under his reform proposal, captives would be considered to be general business corporations and the premium tax imposed on New York captives under New York Tax Law § 1502-b would not be applicable.
The reform would include all captives, which satisfy the combined reporting requirements, in the definition of a ‘combinable’ entity.
“An alien captive insurance company can be included in a combined report only if it has effectively connected income for the taxable year. There is no limitation that the captive insurance company be domiciled or licensed in New York State. If enacted into law, this captive insurance combination provision would likely result in a significant tax increase.”
