The captive insurance industry has been looking at a number of ways to ensure compliance with the OECD’s strategy to tackle tax evasion and the European Union’s (EU) Base Erosion and Profit Shifting project (Beps). While there have been calls for captive insurance associations to fight against it, the debate still rages on.
Now tasked with showing substance and demonstrating that placing business offshore is not solely tax driven, the adoption of cell structures, commonly referred to as a “rent-a-captive”, is largely seen as an alternative for multinational corporations.
Following the OECD’s clampdown and the introduction of Beps in 2016, a number of countries were placed under the watch of the EU after failing “to meet agreed good tax governance standards.”
Different domiciles reacted in different ways. While Guernsey instantly made a commitment to change aspects of their tax regime, Barbados was placed on the EU’s blacklist before later being moved to close monitoring.
“We were automatically just moved to close monitoring,” says Tony Mancini, tax partner at KPMG in Guernsey. “In Barbados, they didn’t have the same issues we had. They failed because they had these preferential tax regimes, whereas we failed because we don’t have preferential tax regimes, we had a zero tax rate instead, which the EU still thinks is a preferential tax regime.”
Trouble in paradise
Barbados recently responded to the EU’s clampdown, deciding to replace the Exempt Insurance Act with an overarching Insurance Act, meaning captives would be treated as regular insurance companies on the island.
The overhaul of the regime could see an uptick in the number of cell structures being adopted, predicts Steve Clarke, audit and assurance partner at Deloitte in Barbados. This could be triggered by a convergence of the corporate tax rates, potentially causing businesses to pool their risk.
“It would then make sense to have a core where it’s subject to tax,” he tells Captive Review. “This would then be split across the different cells.”
Clarke claims that by setting up as a cell, only the core is taxed, with the broker renting out the cells to different entities. “It could be set up several ways. It could be the broker setting up a core and essentially selling the cells to different entities. Rent-a-captive type structures. The other way, they would have to bare the tax fully.
“In a cell structure, it would be the core bearing the tax and distributing it as necessary. That’s just my thought”, he explains.
Marsh, which boasts a presence in 50 domiciles, recently set up Mangrove Insurance Solutions to cater for cell structures across Washington DC, the Isle of Man and Malta.
Derek Bridgeman, a senior vice president at the company, claims there could be opportunities for multinationals to leverage a protected cell company (PCC) structure following the changes in Barbados due to the nature of the legislation on the island, but not solely for tax reasons.
“If we take a PCC structure in Barbados, the PCC sponsor is required to have the appropriate substance and governance procedures in place. The client would not, in comparison to a standalone captive, have a requirement to physically attend board meetings.
“Although substance and governance are key components of the Beps recommendations when it comes to captives, it’s only one of a number of areas that the industry is aware of. Owners must ensure that appropriate and compliant arrangements around economic rationale, transfer pricing and taxation are in place,” he says.
Mangrove is experiencing a “growing interest” in corporations using cells instead of a captive. While a tax overhaul in Barbados is one reason, Rob Geraghty, also senior vice president at Marsh, says that the reason for an increase in their popularity is due to a variety of factors. “Even companies with the size and scale to form a captive are looking at cells in order to potentially save on cost and time elements, and potentially provide lower capital.
“I have never had so many enquiries about PCCs than I have had this year, and it’s not just enquiries, many companies are following through with formations too,” he says.
Tax is a clear factor in deciding whether or not to adopt a cell structure. However, alongside tax saving, operating costs can also be considerably lower and they can also act as an entry point to the industry.
Mancini explains: “From a practical perspective, the costs of managing a cell structure can be less because you don’t have to appoint your own board. As I understand it, when you first step into the captive industry, a cell structure can be an entry point. You haven’t got to run your own infrastructure or company, the cell does it for you. Is it easier in that respect? Yes.”
Lack of control
Despite seemingly being a smoother path to total self-insurance, some industry players are still not comfortable with how cell structures work, says Mancini.
A perceived lack of controls, as well as a lack of legislation across more domiciles, can also play a factor in their adoption.
“There is only cell legislation in certain domiciles”, says Bridgeman. “Within the EU, there’s only Malta and Gibraltar, so a perceived lack of choice could be a downside. The expectation is that cell legislation will be implemented in more domiciles going forward.”
“If there’s any perceived downside, it may just be the fact that you’re not on the board of directors. There could be a lack of control element, but in reality, this is really not a material disadvantage”, Geraghty adds.
Mancini does not believe this will play a significant factor in how a cell structure is decided, however, claiming that cell owners are often able to set the parameters around how the cell will be operated. “You still have all the economic rights. You don’t have your board or members, you don’t have that greater degree of control, but do you need it beyond the constitutive documents for a company cell?”
Clarke says that he has seen a number of businesses adopt cell structures in Barbados, and tax has just been a “trigger” for this. “I have started to see it in some ways from an advisory perspective, that have, due to tax issues in the US, decided to change their structure and put it through a cell organisation in Barbados. That way, they’re taxed as a US entity, but only the core is, not the individual cells.”
He concludes that the OECD’s stance and Beps are “geopolitical” and that it is not a “level playing field” for entities across different domiciles. “The OECD’s concern is about harmful tax practices, that’s what they say. Their concern is about ring-fencing people and the larger countries not getting their tax. They’re looking at where they can get money… they don’t want others to profit. That’s what it is.”