By Jennifer Kobylarz, CPA, MST
As a result of the Tax Cuts and Jobs Acts of 2017 (TCJA), there are some changes to insurance and reinsurance tax ramifications, specifically as it relates to foreign corporations and ownership.
Reinsurance is defined as insurance by another insurer of all or a part of a risk previously assumed by an insurance company.
Reinsurance companies, which are being used by a variety of industries such as manufacturing, distribution and construction companies to name a few, may now have different reporting requirements and associated federal taxes in foreign entities.
"CFC" Controlled Foreign Corporation
A Controlled Foreign Corporation (CFC), in reinsurance, for example, how a typical reinsurance company domiciled in Turks and Caicos is structured, should generally be protected from any additional taxes and/or reporting pre TCJA, provided that the proper elections have been filed.
These include Internal Revenue Code Section 953(d) to be taxed as a domestic insurance corporation for federal income tax purposes, as well as Internal Revenue Code Section 831(b) election to be taxed generally on investment income only. The TCJA did increase the annual premium threshold to $2.3 million in 2018, but the rules of controlled groups for multiple companies are still in effect.
"NCFC" Non-Controlled Foreign Corporation
A Non-Controlled Foreign Corporation (NCFC) in reinsurance, is typically owned by a minimum of 11 unrelated U.S. participating shareholders or foreign owners and domiciled in an offshore country such as Bermuda. They are similar in nature to the CFC, but they don’t have the $2.3 million ceiling on annual premiums. U.S. Shareholders cannot own more than 25% of this foreign corporation. The TCJA expanded the definition of a U.S. Shareholder and as such, more of these programs will be ineligible to be considered a NCFC, and U.S. owners may become subject to foreign income reporting at the individual tax level on corporation earnings and deemed and repatriated foreign as the Global Intangible Low-Taxed Income (GILTI).
Each corporation, shareholder and individual will have their own set of facts and circumstances, and we advise you to discuss with us and/or your third party administrator, if applicable.
