3 Most Common Methods of Captive Re-Domestication
There are three common ways that a captive can be re-domesticated, each with its own benefits and constraints.
Because each domicile has its own laws regarding corporate organizations, the assistance of a legal professional experienced in the applicable domicile is vital. The three re-domestication methods include:
1. Merger – Often done by statutory means, a merger is usually the simplest form of re-domestication. Through this process, the captive moves its business from an entity incorporated in one state to an entity incorporated in another state -- a new domicile.
If available, a merger is typically the most efficient re-domestication tactic and usually qualifies as a tax free re-organization. It allows the organization to utilize the capital in the entity incorporated in the original domicile to create the entity that’s formed in the new domicile, while minimizing operating costs.
In a merger scenario, regulatory consent is required by the old domicile, and an abbreviated application process takes place in the new domicile. A formalized plan of merger is also required to be filed in both states to explain the nature of the transaction.
2. Simultaneous run-off – This process involves the simultaneous operation of two different captives. A new captive is formed in the new domicile to write insurance business on a prospective basis, while the old captive in the former domicile continues to pay off the liabilities from past policies.
This method is the most inefficient since it requires the capital and frictional costs to operate two individual entities. However, a run-off arrangement is also the most flexible. The process requires a complete application in the new domicile, but no other consents or approvals are needed from the old domicile or other insured parties.
3. Assumption/portfolio transfer – This is a transitional approach in which the insured agrees to look only to the captive formed in the new domicile for the payment of covered claims. During the transition, the captive formed in the old domicile transfers the old insurance business to the entity formed in the new domicile through a loss portfolio transfer. The old entity is then liquidated after all of the insurance business has been transferred.
This process requires a complete application process to form an entity in the new domicile. The old domicile must approve of the loss portfolio transfer and ultimate liquidation of the original entity.
In addition, the consent of all insureds may be necessary, which could be difficult if the captive involved third-party risks. Also, the transitional approach may require additional capital and incur frictional operating costs during the transition phase. This process may be treated as a tax-free reorganization, but could have some tax consequences due to the reinsurance transaction involved.
Foreign to Domestic Issues
The re-domestication process from a foreign jurisdiction to a domestic domicile can add some layers of complexity, and there are a few additional items of which to be aware. Most foreign jurisdictions require some additional approvals, including certain publication and deregistration requirements, which could take time to obtain. There may also be some additional tax implications due to the repatriation of previously untaxed earnings.
Free Download: Offshore to Onshore -- For an informative look at the latest trends in captive insurance domiciles, download “Offshore to Onshore: Re-Domestication of Captive Insurance Programs."
Wilmington Trust neither claims to nor provides legal or tax accounting services. Clients should consult professional tax and legal advisors regarding favorable tax treatment of any particular strategy.