INTM210800 - Controlled Foreign Companies: The CFC charge gateway chapter 7 - captive insurance business: captive insurance companies resident in an EEA state
TIOPA10/S371GA(7) applies to a captive insurance CFC’s profits to the extent the two conditions in TIOPA10/S371GA(6) are met. These are:
- the CFC is resident in an EEA state for the accounting period; and
- the profits do not arise from the activities of a PE that the CFC has in a non-EEA state i.e. the activities must be performed in the EEA.
Where TIOPA10/S371GA(7) applies, insurance profits from an EEA resident captive insurance CFC fall within the Chapter 7 charge gateway only to the extent that they are derived (directly or indirectly) from either:
- a contract of insurance, for which the insured has no significant UK non-tax reason for entering, or
- in the case of a contract of reinsurance, where the original insured (see TIOPA10/S371GA(9)) has no significant UK non-tax reason for entering into the original insurance contract.
TIOPA10/S371GA(8) defines UK non-tax reason for the purposes of TIOPA10/S371GA(7) as any reason other than one relating to an actual, or potential, UK tax or duty liability.
In order to consider whether a UK resident company had a significant UK non-tax reason for entering into a contract of insurance with a CFC, it will be necessary to establish the value of the UK non-tax benefits within the total benefits established by entering into the insurance contract.
Whilst each case will depend on its own facts, as a guide for initially assessing whether a non-UK tax reason is significant or not, “significant” could be said to equate to 20% of the overall value of the measurable benefits achieved under that contract of insurance or reinsurance i.e. the UK tax benefits can amount to no more than 80%. This 20% reference point is not however a substitute for analysing the facts of each case on their own merits.
Identifying a significant UK non-tax reason for a captive insurance CFC established in the EEA will require a consideration of the facts and circumstances of each case. A UK tax saving will probably be a factor in most if not all contracts of insurance entered into between connected companies. Whether there are any UK non-tax reasons, and whether those non-tax reasons are significant, will have to be considered in each case. Economies of scale or releasing group capital are non-tax factors, but we would have to consider whether they amounted to significant reasons for entering into the contract of insurance or reinsurance.
The measurement of the benefits achieved should focus on those achieved by the insured person, or original insured party where the risk is reinsured. The test looks at the benefits achieved by the contract of insurance in question and not the benefits achieved by comparison with the benefits from taking out a contract of insurance with a third party. Benefits which it may be appropriate to consider include, but are not limited to:
- the UK tax deductions achieved by the premium,
- the tax savings on the investments income arising within the CFC, rather than in the UK,
- benefits achieved where the insurance of the risk is not available, or is prohibitively expensive, within the main insurance market, and
- benefits achieved by the lower regulatory or capital requirements in the EEA territory, which may be reflected in the price the UK insured pays in premiums compared with the price they would pay to another insurer.
It will be unlikely for amounts to fall within TIOPA10/S371GA(7) where the contract of insurance is taken out in cases such as clear commercial (i.e. to insure against property or business continuity risks) or legal reasons (i.e. the insurance is needed in order to carry out the trading activity.
The presence of significant UK non-tax reasons will be less obvious, and therefore should be subject to closer scrutiny, where the risk insured:
- is not to cover a clear commercial risk exposure,
- has never previously been insured by the group with a 3rd party insurer, or
- where the risk covered is peculiar.
The extent to which significant UK non-tax reasons are present will be determined on a reasonable test basis, which will depend on the specific facts and circumstances of each case.