Responding to the crisis created by the Tax Cuts and Jobs Act’s new base erosion and anti-abuse tax (BEAT), Vermont passed new legislation facilitating the redomestication of overseas affiliated reinsurance companies. Once established in Vermont, affiliated reinsurance companies will be able to avoid the BEAT and the federal excise tax applicable to reinsurance premiums, and take advantage of the new lower rates applicable to corporations and Vermont’s cap on premium taxes.
On May 17, 2018, Governor Phil Scott signed legislation intended to facilitate the redomestication to Vermont of overseas reinsurance companies negatively impacted by the 2017 Tax Cuts and Jobs Act (the “TCJA”).
A copy of the new legislation, H.719, is available here.
Though overshadowed by some of its other provisions, the TCJA includes a new tax that may render certain overseas reinsurance arrangements uneconomic. This tax, the base erosion and anti-abuse tax (“BEAT”), operates as a minimum tax. It generally applies to taxpayers that (i) earn at least $500 million in average annual gross receipts, and (ii) have a base erosion percentage of at least 3%. The base erosion percentage is the ratio of the taxpayer’s base erosion payments and all other deductible payments. Reinsurance premium payments are expressly included in the definition of base erosion payments.
If applicable, the BEAT is the excess of (i) the minimum rate applied to the taxpayer’s taxable income after adding back base erosion payments, over (ii) the taxpayer’s corporate tax liability at the regular corporate rate. The minimum BEAT rate is 5% for 2018, 10% for 2019-2025, and 12.5% for 2026 and later years. The BEAT is in addition to, not in lieu of, the 1% excise tax that is due in connection with premiums paid to overseas reinsurers.
Vermont’s new legislation is intended to encourage overseas reinsurers to redomesticate to Vermont. Redomestication would enable a reinsurer to avoid the BEAT (and the excise tax) and allow the reinsurer to benefit from the TCJA’s steep reduction in the regular corporate income tax rate (in many cases down from 35% to 21%).
The new legislation creates a new class of reinsurers—affiliated reinsurance companies (“ARCs”)—and is structured such that insureds in other states should receive credit from their domiciliary regulator for the reinsurance provided by an ARC.
ARCs will be regulated by the Captive Division of the Vermont Department of Financial Regulation. Vermont’s captive regulators have a well-earned reputation as the “gold standard” for their responsiveness and flexibility, and for the depth of their understanding of the insurance industry.
Other potential benefits to ARCs include (i) a focused licensing process, (ii) flexible investment guidelines, (iii) relatively modest minimum capital and surplus requirements, and (iv) a $200,000 cap on premium taxes.
The new legislation will become effective on July 1, 2018.