8179 / What taxes apply to a foreign captive that do not apply to a captive formed domestically?

While captives that are formed in foreign jurisdictions can often take advantage of tax benefits that are not available within the U.S., these captives may become subject to U.S. excise taxes that erase the benefits of a foreign domicile.

A U.S. excise tax of 1 percent is applied to gross reinsurance and life insurance premiums and a 4 percent excise tax is applied to direct property and casualty premiums paid to a foreign insurer.¹

Further, U.S. shareholders of a controlled foreign corporation (CFC) must include their pro rata share of the CFC’s insurance income in their gross income if their stock ownership exceeds certain threshold amounts.² A foreign captive will be considered a CFC if U.S. shareholders (as defined below) own more than 50 percent of either (a) the combined voting power of the corporation or (b) the total value of the corporation.³

A “U.S. shareholder” is defined, for these purposes, as a person who owns at least 10 percent of the total combined voting power for all classes of stock in the foreign corporation.⁴

While the captive itself is not taxed under the CFC provisions, the U.S. shareholders are treated as though they have received a distribution of the insurance income and are taxed on this income. For example, if a corporation organized in the U.S. forms a captive in Bermuda and distributes ownership of the captive among its U.S. subsidiaries, those U.S. subsidiaries will be taxed based on their proportionate ownership shares in the captive.