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to the Proposed 1297 Regulations does clarify that any non- U.S. insurer that is treated as an insurance company for U.S. tax purposes (i.e., is taxable under subchapter L of the Code as an insurance company) is necessarily predominantly engaged in an insurance business for purposes of the statutory test.
The Proposed 1297 Regulations raise many difficult interpretive issues and questions that could affect hedge fund reinsurer structuring, and that extend beyond the hedge fund reinsurer context. For example:
What test would be applied to determine whether someone is acting in the capacity of an officer or employee of the non-U.S. insurer? Would a leased or seconded employee of a non-U.S. insurer suffice? How would an insurance management arrangement be treated if the employees of the insurance manager are named officers of, or leased employees to, the non-U.S. insurer, and would the degree of control by officers and employees of the non-U.S. insurer over the insurance manager employees matter?
As the Proposed 1297 Regulations treat investment activity as part of the insurance business to the extent such activities are required to support, or are substantially related to, the issuance of insurance, annuity or reinsurance contracts, what degree of control must the officers and employees of the non-U.S. insurer exercise over an investment manager that invests substantially all of the non-U.S. insurer’s assets pursuant to a multiyear contract to satisfy the Insurance Company Exception?
What tax policy objective is served by altering the 367 Active Conduct Regulations definition of “active conduct” to exclude officers and employees of related entities for purposes of the Proposed 1297 Regulations?
What impact will the Proposed 1297 Regulations have on non-U.S. captive insurers and segregated cell companies?
What impact will the Proposed 1297 Regulations have on a non-U.S. catastrophe reinsurer in a year in which reserves are relatively low?
Many of these issues and questions could be avoided if the Proposed 1297 Regulations adopted a more objective test as found in other areas of the tax law, rather than the Section 367 Active Conduct Regulations test requiring a non-U.S. insurer to have its own officers and employees, a test which was designed to ensure that transfers of appreciated assets outside the United States were undertaken for sound business reasons and not purely for tax avoidance. The legislative history of the Insurance Company Exception indicates a congressional concern over abuse of this exception by overcapitalized non-U.S. insurers that generate investment income in excess of the reasonable needs of its insurance business, and this concern could be addressed without resorting to the 367 Active Conduct Regulations test.
Treasury has received significant public comments on the Proposed 1297 Regulations and conducted a public hearing on September 18, 2015. Treasury and the IRS have informally indicated that regulations may be re-proposed in relatively short order.
On June 25, 2015, Senator Wyden introduced a bill that would require a non-U.S. insurer to maintain insurance liabilities of more than 25% of total assets to qualify for the Insurance Company Exception, unless the insurer can qualify for a temporary Insurance Company Exception which would require its insurance liabilities to equal or exceed 10% of its total assets and the satisfaction of a facts and circumstances test. The likelihood of passage of the Wyden bill in this Congress appears slim.
E. Implementation of BEPS Recommendations in the U.K.
1. Introduction
International tax planning continues to be at the forefront of government thinking around fiscal policy. During 2014, the Organisation for Economic Cooperation and Development (“OECD”) released draft papers in relation to its Base Erosion and Profit Shifting Project (“BEPS Project”) and the U.K. introduced the Diverted Profits Tax (“DPT”).
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
VII.Tax