GIM11070 - Captive insurers: controlled foreign companies (CFCs): general rules
A UK company which has a relevant interest in a captive insurer is subject to the same CFC rules as any other UK company. These rules are described in detail atINTM201000 onwards. Under CTSA, a UK company which holds a relevant interest of 25% or more in a CFC must make a return which includes the CFC supplementary pages, and calculate any tax due in accordance with ICTA88/S747 and ICTA88/SCH25.
The key points are that unless the CFC meets the requirements of the excluded countries’ list, the exempt activities test and passes the motive test, its profits will have to be apportioned to the UK company. Following the introduction by FA09/S34 and FA09/SCH14 of an exemption for foreign dividends, the acceptable distribution policy (ADP) exemption from CFC apportionment ceased to apply to any accounting period that begins on or after 1 July 2009.
Lower level of tax
To fall within the definition of a CFC a company must be subject to a lower level of taxation (see INTM202030). Applying this standard may require particular care in the case of general insurance companies because of the potential for significant differences between provisioning and loss equalisation rules that apply in different territories, and the possible application of funded (non-annual) accounting.
Tax paid by ‘international companies’ in certain offshore financial centres, for example Guernsey, is treated as tax for comparison purposes.
Excluded countries list
Captives are unlikely to benefit from this list because their domiciles are either likely to be not normal rate territories (for example, Isle of Man), or the captive is likely to be enjoying a tax benefit on part 2 of the list (for example, Dublin Financial Services Centre).
Exempt activities test
A captive may pass this test. All companies carrying on exempt activities must occupy premises in the domicile and the business affairs must be effectively managed there. This requires a suitable staffing presence. If a managing agent is employed, staff and premises may be arranged through direct employment and premises hire. Business International can advise on such arrangements.
As an insurance company falls within the definition of a wholesale, distributive or financial trader, the test cannot be passed where more than 50 per cent of commissions or net (of reinsurance) premiums are derived directly or indirectly from connected or associated persons, or from persons with at least a 10 per cent interest in the company, and which are attributable directly or indirectly to the liability of an associate. It follows that premiums paid via a fronting company (GIM11030) will be treated as from an associate so long as the insured liability is that of an associate. A captive wishing to benefit from this test must therefore insure the liability of third parties. This is most commonly encountered in warranty insurance and creditor insurance arrangements. See GIM11190.
Motive test
Any suggestion that the motive test applies should be referred to Business International.
