Extras on Excise: States Amend Insurance Laws in Captivating Race with Vermont


Vermont has a reputation as a haven for campers and other enthusiasts who love the outdoors. But in corporate planning circles it is known as a paradise for companies that choose to self-insure against certain risks.   

But recent developments suggest that other states are not far behind. 

Ohio is the first state of 2014 to enact legislation allowing captive insurance companies to form in state, joining over 30 other captive friendly jurisdictions in the United States. Five other states have also passed legislation updating their laws regarding captives. 

Captive insurance companies (captives) are wholly owned subsidiaries that insure or reinsure only the risks of its parent company and the parent company’s affiliates. They operate like other insurance companies, but they are held “captive” by their parent company because they cannot insure risks of others outside of the parent company’s group. 

But what is so interesting about captive insurance companies?

Captives offer enhanced risk management, reduction of the cost of risk, and tax benefits because they are designed to address the parent company’s particular risk management needs. Parent companies can create a captive made to their specifications, instead of having to use other insurance products that may not be the right fit or are more costly. This reduces the parent company’s insurance costs and minimizes loss exposure.  

States like captives because they bring in jobs, and more importantly, revenue in the form of a tax on premiums or income. As discussed in Bloomberg BNA’s 2014 State Tax Outlook, the three most common tax methods are: 

  • A premium tax by the domiciliary state where the captive is formed,  
  • A tax on the insured parent company that pays a premium to a captive in another state (called a direct procurement tax; this method is used by most states), or 
  • A tax on the income of the captive (a more recent development).

States wanting to attract new captives will often limit taxes on premiums paid to captives in state, which parent companies like because this lowers their tax burden. Relocating captives to the parent company’s “home” state may also lower the parent company’s tax burden. But captives and their parent companies do have to be careful of situations where they might be subject to double taxation based on different state tax policies. 

Vermont is the number one jurisdiction in the United States with the most captive insurance companies (1,000). Vermont has had success with captives because it “has demonstrated a willingness to quickly consider and pass cutting-edge legislation so as to keep Vermont’s captive laws competitive with those of other jurisdictions,” according to an article published in Business Law Today

Other states are trying to compete with Vermont, and trying to increase their tax revenues along the way. For example, Missouri has licensed six new captives for the first half of 2014, and expects to see the same number licensed in the second half of the year. 

Many states are working to improve their tax laws regarding captives so they are more competitive. Here is a brief outline of some of the legislation enacted in 2014 so far: 

State

Bill No.

Summary of Legislation 

Connecticut

SB 188

Makes several changes to existing captive law, including expanding the coverage of branch captives, establishing provisions for captives to relocate to CT, and extending other provisions

Indiana

HB 1206

Allows Indiana to tax certain foreign and alien captives operating within the state (retroactive and effective from tax years beginning Jan. 1, 2013)

Ohio

HB 117

Allows the formation of captive insurance companies in state and establishes capital and financial reserve, organizational, and other requirements   

South Carolina

SB 909

Allows the department of insurance to declare captives inactive in certain circumstances and allows the director of the department to modify the minimum tax premium applicable to the company during the period of inactivity

South Dakota

HB 1051

Requires a captive to file a certified copy of its governing documents and a statement showing its financial condition, and any other documents required, before receiving a certificate of authority 

Vermont 

HB 563

Allows captives to obtain a certificate of dormancy; captives will not be liable for tax paying while dormant

So 2014 is shaping up to be a busy year. Bloomberg BNA will be watching developments regarding captives during the second half of the year to see if other states join Ohio and pass captive-enabling legislation.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think your state should allow captive insurance companies to operate? 

For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library. 

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