Reinsurance tax bill targets hedge funds

Hedge fund reinsurers have been targeted by legislation introduced to counter offshore tax avoidance.

The bill, which was introduced by Oregon Senator Ron Wyden, is aimed at closing the tax loophole which allows hedge fund reinsurers to take advantage of an exception to the passive foreign investment company (PFIC) rules of the US law.

Wyden believes that The Offshore Reinsurance Tax Fairness Act will provide a bright-line test for determining whether a company is truly an insurance company for purposes of the exception to the PFIC rules.

“We need a fair tax code that doesn’t allow for winners and losers,” Wyden said. “For over ten years now this loophole has allowed some hedge fund investors to avoid paying hundreds of millions of tax dollars. It’s time we shut it down for good.”

The legislation builds on requests over the past year by Wyden to the Treasury Department and IRS to issue guidance to help end this abuse.

“In April, the agencies proposed regulations that provided a first step in addressing the issue. The Offshore Reinsurance Tax Fairness Act goes further in fully closing this long-standing tax loophole by creating a bright-line test for determining whether a company is an insurance company for purposes of the exception,” said Wyden.

Under the new rule, to be considered an insurance company, the company’s insurance liabilities must exceed 25 percent of its assets.

“If the company fails to qualify because it has 25 percent or less (but not less than 10 percent) in insurance liability assets, the company may still be predominantly engaged in the insurance business based on facts and circumstances,” said the bill.

A company with less than 10 percent of insurance liability assets will not be considered an insurance company and, therefore, would be ineligible for the PFIC exception and subject to current taxation.