The Gazette 1991

GAZETTE

NOVEMBER 1991

allows reinsurance captives to reduce taxable income by creating catastrophe reserves. But then to pay a dividend to the parent, those reserves must be taken back into revenue and the Luxembourg tax paid on it is 37%. A rate of 10% is guaranteed in the IFSC up until December 31, 2000 and it may be extended beyond that date. There is no premium tax in Ireland on international insurance and no capital gains tax on trading income arising from the IFSC activities. There is no valued-added tax on services supplied by firms located in the Centre. Ireland has double taxation treaties with 21 countries. In general they benefit captives in that dividends paid from the Dublin captive to treaty-country owners may receive up to 100% exemption when repatriated. Most of the countries with which Ireland has double taxation treaties have tax "Sparing Clauses", so that the dividends can be repatriated almost tax free. Setting up in the IFSC is aided by a package which includes a 200% deduction of rent expenses to lessees in the IFSC for 10 years and a 100% write-off in the first year of new building costs for lessors. In addition there is the 100% write- off in the first year of spending on new equipment. All these factors combine to make Ireland the most attractive domicile in which to incorporate a captive insurance company. Increasing European interest The concept of captive insurance is well established in the United States but is relatively new to Europe. Many European companies are now becoming bigger, partially as a result of the drive towards the single market, and as a result are becoming more sophisticated in their insurance buying. Three hundred of the top five hundred American companies already have captive insurance subsidaries, while only thirty of the top five hundred European companies have captive subsidaries. The advan-

The advantages of a captive There are four major reasons for establishing a captive. Firstly, to insure risks not covered by traditional insurance. Captives are becoming particularly popular in Europe as a means of insuring risks that the market is fighting shy of. Insurers are unenthusiastic about covering pollution liabilities, especially in the context of a move towards a European-wide strict liability regime for pollution risks, and product liabilities, especially where companies have substantial US exposures. Secondly, a captive can provide a flexible well managed risk portfolio. The apportionment of risk can be fully determined by the captive. In this way, lucrative business can remain with the captive, whilst less profitable risk can be handled on the reinsurance market. Thirdly, there is the cost advantage of eliminating the middleman (i.e. the traditional insurance company), the captive gaining the benefit of direct access to the reinsurance market and its low costs. Finally, the premiums are held by the captive for payment to cover losses as necessary, but more importantly provide a large source of funds for investment as required by the parent. The major attraction for the estab- lishment of a captive in Ireland is the International Financial Services Centre currently under construct- ion in Dublin docklands. Dublin is the only EC domicile w i th favourable taxation arrangements where "direct writing" is possible, (in the other possible domicile Luxembourg, captive incentives are all limited to reinsurance). This is Ireland's big advantage over Guernsey and Isle of Man. When the single market is a fact, a Dublin captive will be able to write one insurance policy for all EC risks. The IFSC has also advantages for reinsurance captives. Luxembourg The attraction of the IFSC for captives

tages of the IFSC will result in many captives being established there. The IDA has stated that it expects five hundred captives to be established in Dublin by the year two thousand. The establishmerft of a captive In order to gain admittance to the IFSC, a company must first make an application to the IDA, which will in turn forward it to the Certification Advisory Committee of the Department of Finance. The committee will then assess the principals and will consider their objectives. A detailed business plan must be submitted which is required to deal with such issues as underwriting, financing and the capital structure. Projections of premiums and loss levels and discriptions of reinsurance arrange- ments are required. When Committee approval has been achieved, a draft tax certificate is prepared by the Department of Finance. After approval, the tax certificate is issued by the Minister for Finance, specifying the activities that qualify for the 10% rate. Regulatory requirements The main regulatory authority is the Minister for Industry and Com- merce. An Irish direct writing captive is subject to all the rules governing Irish insurance com- panies. The principal regulatory measure for the insurance industry is the Insurance Act, 1936, which has been amended on many occasions most notably in 1989. Directive no. 73/239, O.J.L. 228/3 was imple- mented by the European Communi- ties (Non-Life Insurance) Regulations, 1976. Direct writing captives must have a minimum paid up capital of £500,000 which is not with- drawable or repayable to the company members. All applicants for an insurance authorisation are required to 'limit (their) business activities' to insurance and directly related activities, to the exclusion of all other commercial business. A 331