The Internal Revenue Service (IRS) has announced plans to finalise its micro-captive regulations by mid-2025, as part of its 2024-2025 priority guidance.
This follows the agency's decision in April 2023 to retract its controversial Notice 2016-66 and introduce new proposed regulations. These regulations categorise certain micro-captive transactions as "listed transactions" and others as "transactions of interest".
In its latest announcement, the IRS states that once the updated rules are finalised, certain 831(b) captives will fall under these categories.
However, the specifics remain uncertain, raising questions about whether the final definitions will align with the original proposals, which have faced significant industry pushback.
One key point of contention has been the proposed loss ratio threshold. Under the 2023 proposal, captives with a loss ratio below 65 per cent would be classified as "listed transactions", a criterion that has drawn widespread criticism.
Regardless of whether they opt for the 831(b) tax election, captives and even commercial insurers often report loss ratios at or below this threshold.
In addition to micro-captives, the new IRS regulations will also classify conservation easement transactions and similar arrangements as "listed transactions".
