Extras on Excise: Tennessee Offering Tax Perks for Redomesticating Captive Insurance Companies


In an effort to attract business and jobs to Tennessee, the state General Assembly enacted legislation this year that provides a few incentives to captive insurance companies that redomesticate to the state. 

Under the new law, foreign insurers (from other states) and alien insurers (from other countries) can qualify for a few tax benefits if they decide to move to Tennessee.

Captive insurance companies in Tennessee pay a tax of 0.4 percent for the first $20 million in direct premiums and 0.3 percent for amounts above $20 million. For reinsurance premiums, the tax rate is 0.225 percent for the first $20 million, 0.150 percent for the second $20 million, 0.050 percent on the third $20 million, and 0.025 percent for amounts above $60 million in premiums. Assorted fees also apply.

But captives choosing to redomesticate to the state, meaning that they move their official domicile to Tennessee from another jurisdiction, could take advantage of the opportunity to pay reduced taxes for their first year in state.

Here is a summary of the incentives that H.B. 2228 offers to captives:  

  1. Captive insurance companies that redomesticate to Tennessee after July 1 of any year are only liable for one-half of the minimum/maximum captive insurance premium tax amounts for the first year, which generally range between $5,000 and $100,000.
  2. Alien captive insurance companies can elect to forego payment of premium taxes for either their first or second year of operations in Tennessee. However, the election is conditioned on the captive remaining licensed in the state for at least five years after redomestication. If a captive makes the election, and then surrenders its license or redomesticates to another jurisdiction, the captive has to immediately pay the tax, plus an additional 10 percent per year from the time the tax would have originally been due without the election.
  3. Business entities that redomesticate their captive insurance company to Tennessee by Dec. 31, 2018, or transfer a complete line of business or geographic risk to a Tennessee captive between Jan. 1, 2016 and Dec. 31, 2018, won’t be liable for unreported self-procurement taxes imposed by Tenn. Code Ann. § 56-2-411 for contracts or policies procured prior to the redomestication, provided that the policies or contracts are substantially similar to the policies or contracts procured after redomestication. 

The Tennessee Department of Commerce and Insurance estimates that approximately four captive insurance companies could redomesticate to Tennessee each year based on the new law. Also, premium tax growth rates for the first three years are 14.9 percent, 45.5 percent and 72.1 percent, respectively, which brings in additional revenue for the state after the captives’ first year if they elect to take advantage of the tax benefits, according to the fiscal note to the bill.

H.B. 2228 also changed the premium tax due date to March 15, instead of March 1.

   

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think captive insurance companies will take advantage of these tax incentives? 

With a free trial to Premier State Tax Library, practitioners have a single trusted resource that provides all of the tools and information they need to develop and implement the right tax strategies.