Industry experts discuss why companies are choosing to redomesticate their captives and the opportunities it provides them
Choosing the right domicile is an important part of the set up of forming a captive insurance company.
However, things can change within a business which mean the original domicile isn’t always the forever home of the captive.
Changes can vary as well as unpredictable and uncontrollable, for example, regulatory changes, a change in the regulator personnel, a change in the service provider as well as various other factors.
Adam Miholic, senior consultant, captives at Hylant, explains that the evaluation of a captive’s current domicile should be an annual focus, which often means taking the form of legislation or operational update at the board of directors meeting.
However, Miholic notes that many current captive owners are proactively seeking the guidance from their managers and advisors on what impact, if any, a domestication of the captive may have.
“Many of these conversations are a result of two main environmental factors: the current economic status for many captive owners during this challenging environment, and the intense focus of some states to actively seek out and impose taxes and/or fines on captive owners who have domiciled out of their ‘home state’,” he adds.
Reasons for redomestication
As mentioned above there are a number of factors why a captive chooses to redomesticate. Miholic suggests that most redomestications occur when the parent company/companies experience a change in operations or structure that impacts the captive.
He says: “These changes could stem from merger and acquisition activity, corporate legal or tax structure, ownership transitions, and many more. No matter the genesis of the change, the redomestication process should always focus on ensuring the captive remains aligned with the goals and objectives of the parent company.”
Martin Eveleigh, chairman at Atlas Insurance Management, says that reasons can vary considerably.
In some cases, Eveleigh explains it can be the unwillingness of some banks and investment managers to open accounts for foreign captives leads to a move onshore while in others it can be a change to a captive’s business plan, expansion of its underwriting activities or new fronting or reinsurer relationships can lead to a reassessment of domicile choice.
He states: “This is particularly true where the captive is established in one of the lesser offshore domiciles.”
Eveleigh also suggests there have been some captive owners choose to move onshore as a result of the Internal Revenue Service’s (IRS) campaign against captives taking the 831(b) election; the concern being the consequences of revocation of a 953(d) election.
The IRS ramped up its scrutiny in November 2016 with the release of Notice 2016-66, which identified certain micro captive transactions as having the potential for tax avoidance and evasion.
Under section 831(b) of the US tax code, captive insurers that qualify as small insurance companies can elect to exclude limited amounts of annual net premiums from income, so that the captive pays tax only on its investment income.
Procedure
Before captive decides to relocate it should complete a full analysis of the current domicile as well as the proposed new jurisdiction.
Miholic suggests that a thorough review of the strategic, operational, and financial aspects of the domiciles should be considered.
He adds: “Once a decision has been made on redomestication, it is important that all requirements pertaining to notifications, claims and policy administration, and legal matters are followed in order to properly transition the captive to another jurisdiction.”
Eveleigh adds that the process is different depending on the domicile in question.
“In essence, there is a regulatory process in which the captive seeks approval from its existing home regulator to leave and approval from its new domicile for the move and the issuance of an insurance licence there,” he explains.
Alongside that, Eveleigh notes, there is the legal process of moving the company from the corporate register of one domicile to that of another.
He highlights that a redomestication does not involve the replacement of one corporate entity with another; the company that arrives in the new domicile is the same corporate entity as the one that left the old domicile. Although he does explain that it will be subject to different laws.
Opportunities
Although there are very few challenges associated with redomestication, Miholic says it has the opportunity to provide both financial and operational benefits to captive owners.
He suggests that potential tax benefits and annual fees are often a focus of the financial considerations among active captive domiciles.
“In addition, many captive owners are interested in active captive regulators who offer the flexibility and control commonly associated with captive insurance,” he adds.
As both new and existing captive domiciles update their legislation to reflect the needs of the industry, Miholic explains that many current captive owners also re-evaluate their business plans.
Eveleigh says apart from any beneficial tax consequences, there are three main types of opportunity.
The first is for the captive to present itself differently to those with whom it does business.
He says: “For example, a fronting company may be influenced by the domicile of a captive that needs access to the admitted paper.”
The second that Eveleigh notes is the opportunity to transact business that is permitted by the new domicile but not the old.
Finally, he explains there is the opportunity to take advantage of different company law regimes, perhaps by using a corporate form available in one jurisdiction but not another such as a series LLC.
