Presentation on theme: "Www.bermudacaptive.bmJUNE 2 - 4, 2014. Introduction to Captives and the Bermuda Domicile Moderator: Federico Candiolo, Counsel, ASW Law Ltd Panelist(s):"— Presentation transcript:
Introduction to Captives and the Bermuda Domicile Moderator: Federico Candiolo, Counsel, ASW Law Ltd Panelist(s): Roger Aliaga-Diaz, PhD, Senior Economist, Vanguard Investment Strategy Group Gerardo Filorio, Business Administration, Director, Lockton, Mexico Dr. Marcelo Ramella, Deputy Director, Policy and Research, Policy, Legal Services & Enforcement Department, Bermuda Monetary Authority Tino van den Heuvel, Partner, Tax Attorney, Hill Smith King & Wood New York
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Today’s Topics: 1.Tax treatment of the insured 2.Taxation of the captive insurance company 3.Tax treatment of the owner of the captive insurance company Overview
Overview Base Case Legend A corporation. Unless otherwise stated all entities are wholly-owned An individual (natural) person or a group of individuals Captive Insurance Cy (Bermuda) Operating Subsidiary (Colombia) Operating/Holding Cy (Peru) Owner (Peru) Insurance Premiums 1. 2. 3.
Many LATAM countries have a consider- able corporate tax rate and thus imposing a high cost on (i) earned, (ii) retained and (iii) distributed income. Therefore, if properly structured a captive insurance company may significantly reduce the effective tax rate of the insured company by deduction insurance premiums paid to the captive insurance company Tax treatment of the Insured
Deductibility and timing of the insurance premiums: –Most LATAM countries allow for a deduction of insurance premium payments to related captive insurance companies; –Some countries however defer the deduction of the insurance premiums to a captive insurance company if it is based in a tax haven to the moment they are actually paid; –A number of countries restrict deductions if the captive insurance company does not have sufficient (functional) substance. A captive with only a few insured participants or inadequately financed may not be respected. Deductibility Premiums
Withholding taxes on insurance premium payments: –Almost all LATAM countries impose withholding taxes at the source on the payment of insurance premiums. Usually the rate of withholding depends on the location of the captive insurance company. If the captive is based in a tax haven country then the withholding tax rate is usually higher. –In these cases the interposition of a holding company in country which has a tax treaty with the country of the insured company may offer a solution. Under most treaties the insurance premiums are treated as business profits and thus allocate the right to tax to the recipient country. –Bermuda has entered into a significant number of Taxation Information Exchange Agreements with countries which results in the removal of ‘blacklists’ and a reduction of withholding taxes. Withholding Taxes on Premiums
Main tax considerations: –Income tax rate –How is taxable income determined? –Dividend withholding tax on distribution of profits? –Tax treaty network? Taxation of the Captive
Controlled Foreign Corporation (“CFC”) legislation: –Under CFC legislation the owner of the captive insurance company would have to include in income on a current basis, whether distributed or not, the profits of the insurance company if certain conditions are met; –Generally, one or more of the following criteria should be met for a company to be considered a CFC: A certain ownership percentage by one person of the company’s shares; The company’s income is derived from passive investments (e.g., dividends, interest, etc.) or related party transactions The company is based in a tax haven; –CFC legislation effectively eliminates the tax benefits of a captive insurance company if applicable. Taxation of the Owner
Tax treatment of dividends received from the captive insurance company: –Many countries apply a partial exemption or lower rate to dividends received by individuals from corporations; –Careful planning may allow for the efficient repatriation of the profits of the captive insurance company. Estate Planning: –Captive insurance company by their nature as investment vehicles are a great estate planning tool through which wealth can be distributed over multiple generations without or minimal taxes. Taxation of the Owner
Example Planning Structures Venezuela Captive Insurance Cy (Bermuda) Operating Cy (Colombia) Operating Cy (Venezuela) Trust (Offshore) Insurance Premiums Owner (Venezuela) Settlor Beneficiaries (Venezuela) EU Holding Cy (EU) For Illustration Purposes Only Re-insurance Premiums