IRS Rules Would Close Hedge Fund Reinsurance Tax Break

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April 23 — The IRS proposed rules (REG-108214-15, RIN 1545-BM69) intended to prevent offshore hedge funds from operating as insurance companies to avoid taxes—regulations that won't shut down targeted structures immediately, but have a broad reach nonetheless.

The rules are aimed at stopping situations where a hedge fund establishes a “purported” foreign reinsurance company to avoid the tax the fund would otherwise owe on investment income. They make it more likely that these companies will be treated as passive foreign investment companies—subject to a harsh tax regime—by making it tougher for them to be considered as active insurance businesses.

The action drew praise and a promise of more work from Sen. Ron Wyden (D-Ore.), the Finance Committee's ranking member. He called the rules “an important first step down the path toward better enforcement,” but left legislative action on the table.