A.M. Best Briefing: A.M. Best Comments on Proposed U.S. Tax Changes for Offshore (Re)Insurers
OLDWICK, N.J.–(BUSINESS WIRE)–Proposed U.S. legislation aimed at preventing offshore tax avoidance by closing a tax loophole that allows offshore reinsurers to take advantage of an exception to the passive foreign investment company (PFIC) rules of the U.S. Tax Code will not lead to rating revisions over the near term, according to a new briefing from A.M. Best.
The Best’s Briefing, titled, “A.M. Best Comments on Proposed U.S. Tax Changes of Offshore (Re)Insurers, states that companies would likely seek operating alternatives to ensure capital efficiency if the tax benefits for offshore companies are eliminated. The draft legislation, titled, “The Offshore Reinsurance Tax Fairness Act,” is aimed at providing a bright line test for determining whether a company is truly a(n) (re)insurance company for the purposes of determining exceptions to the PFIC rules.
Under the proposed rule, to be considered a true (re)insurance company, its (re)insurance liabilities would need to exceed 25% of its invested assets. If the company fails to qualify because its (re)insurance liabilities are less than the 25% threshold, but not less than 10%, the company could still be considered predominantly engaged in the business of (re)insurance based on facts and circumstances.
The flexibility provided by the determination based on facts and circumstance also seems to be aimed at those (re)insurance companies that at times may not hold a large base of (re)insurance liabilities due to the absence of large loss events, but nonetheless do take significant (re)insured risk. An additional issue is new company formations that have not built a reserve base to unity.
