Optimal Conditions For Captives To Flourish, Expert Tells ICAP

by Carla Johnson, Investors Offshore.com

06 June 2003

According to one expert at the International Captives Congress taking place in Bermuda this week, the conditions are very favourable for US firms wishing to set up captives.

Tom Jones, a partner at McDermot, Will and Emery and a specialist on the captive industry told the conference that the IRS no longer considered captives as purely being vehicles for avoiding tax and has "de-coordinated" its captive insurance strategy.

"De-coordination may mean that the IRS is scaling back its efforts to challenge captive insurance arrangements and that, on a going forward basis, captives may be subject to less scrutiny, except in abusive cases," remarked Mr. McDermot, adding: "The tax climate in the US is better than it has ever been for captives."

However, on the issue of loans of captive assets back to parent companies, there was still a huge grey area in the rules which the IRS is currently trying to clarify said McDermot. "The IRS is trying to draw a line in the sand between an insurance company and an investment company. This is going to be difficult – and it could be an earthquake depending on where they draw the line. Some innocent insurance companies are going to be labelled as investment companies, and some investment companies are going to be labelled incorrectly as insurance companies," McDermot told the conference.

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