The Offshore Captive Insurance Company in 2017

The two most powerful offshore tax planning tools are insurance products. Offshore life insurance allows you to create a massive tax free or tax deferred account for your personal investments. An offshore captive insurance company allows you deduct up to $2.2 million a year from your US business, moving that money offshore tax deferred. This article will describe how to use an offshore captive insurance company in 2017 to save on your taxes.

An offshore captive insurance company is licensed in a tax efficient jurisdiction such as the Bermuda. They’re referred to as “captives” because they write insurance exclusively for their parent company.

Captive insurance has been around since 1950, and has been an important tax planning tool for multinationals for decades. Over 90% of the Fortune 1000 companies use offshore captives, as do many thousands of small businesses. About half of all property and casualty premiums that are written, go through captive insurance companies.

Over 75% of the world’s captives are owned by US companies. Captives are defined under various sections of the Internal Revenue Code and various Tax Court and appellate court rulings. In fact, there’s over 70 years of law in support of offshore captive insurance companies.

This article will focus on IRC §831(b), known as the small offshore captive insurance company statute. This section is used by mid-sized firms and allows a US business to deduct up to $2.2 million as of 2017 (previously $1.2 million) in premiums paid to an offshore captive.

The most popular jurisdiction for IRC §831(b) companies is Bermuda with 958 licenses issued, or 19% of all offshore captives. Bermuda is followed by Cayman with 15%, and Guernsey with 7.4%. European clients typically go with Guernsey and Luxembourg while US clients stay closer to home with Bermuda, Cayman, and Barbados (5.2%).  

Cayman and Luxembourg are the most expensive countries from which to operate a captive. Lower cost options are Belize, Nevis and Vanuatu. Click here to read Belize’s captive insurance law.

The benefits of forming an offshore captive insurance company are:

• Reduce your corporate taxes this year by deducting up to $2.2 million in insurance premiums and deferring recognition of this income for years or decades.
• Moving cash offshore tax deferred and thereby diversifying your corporate holdings.
• Protecting corporate profits from creditors. An offshore captive is an excellent asset protection tool.
• Your captive might choose to insure against events which are extremely unlikely, thus reducing the probability of paying on those policies.
• Can be used to compensate key employees. The employee would be eligible to redeem their shares in the captive upon retirement and would pay tax on the gain at long term rates, which would be lower than other forms of deferred compensation.
• A tax efficient way to self-insure because sinking funds and other forms of self-insurance are not deductible.
• A group of companies might join together to form an offshore captive.

These offshore captive insurance companies are costly to operate and complex to manage. They’re only suited to those with $1 million or more they wish to deduct from current earnings and profits and move offshore.

There’s no minimum insurance premium in these plans. My point here is that it’s not cost effective to setup and operate an offshore captive to deduct less than $1 million a year. Of course, everyone’s situation is different and you might have a different opinion… especially if you go with a low cost jurisdiction like Belize.

Also, your deduction should be consistent over the years. If you’re business is volatile, and you’re unsure you’ll have $1 million to “invest” each year, an offshore captive might not be efficient. It’s best suited to businesses which have been operating for several years and consistently generate $3 to $5 million in earnings and profits.

Forming an offshore captive insurance company in 2017 will require a higher level of due diligence and attention to detail than it has in previous years. While the contribution limit was increased from $1.2 million to $2.2 million this year, so has IRS scrutiny of these plans.

The IRS issued Notice 2016-66 in November 2016 designating small offshore captive insurance companies a “Transaction of Interest.” This means that the IRS is now going to require more data on each captive than was required for prior years. For more information, see: A Detailed Analysis of IRS Notice 2016-66 re 831(b) Captives

The bottom line is that an offshore captive insurance company is an advanced international tax planning tool that will benefit those with excellent international advisors and have a need for a $1 million to $2.2 million tax deferred deduction each year.

I hope you’ve found this article on offshore captive insurance companies in 2017 to be helpful. For more information, or to speak with an expert in these plans, please contact me at info@premieroffshore.com or call us at (619) 550-2743.

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