Expert Commentary

Time To Review Domiciles

While we have previously written about what makes a good domicile, and how to select one, recent developments compel a review of the current situation.

May 2013

In reality, nothing has changed about the standards to apply when analyzing which domicile is best for your captive—good regulations, good regulators, and good government. But today, the proliferation of US-based domiciles has given rise to ever more choices. Let's take a look.

Today, there are approximately 35 states recognized as captive domiciles. By year end 2013, I would not be surprised to see 40 states as domiciles. It is doubtful that we will ever see 50, but it will be close. Why is this?

Reasons for Proliferation

Taxes are a large part of the new picture. It is well documented that the US federal government, in its never-ending quest for new revenue, is always looking at ways to tax offshore companies. Not only do the specifics of these new taxes cause owners to look domestically, but also the attitude behind the taxes and the efforts is telling. Perception becomes reality. As memories of The Firm pass away, we are subjected to the constant harangue that anyone doing business offshore is un-American and not paying their fair share of the tax bill. Unfounded as this position is, it is telling upon business people who are seeking the optimal solution to their risk financing.

We now have the Foreign Account Tax Compliance Act (FATCA), which requires US payers of all types to levy a 30 percent withholding on their transactions with foreign entities. This is a very complex act with many ramifications for captives both onshore and offshore. I urge you to look at it and study it with your professional advisers so that you know how and whether it applies to your business. Of course, many of the rules to be followed under FATCA haven't been written yet, so there is more to come.

FATCA has added to this anti-offshore climate so that new formation rates are declining and redomestications are increasing in many prominent offshore domiciles. This is despite the fact that the regulations, regulators, and overall climate in these domiciles have not changed, and they are still premier locations in which to locate a captive.

Federal Regulation

Amid the onshore/offshore confusion comes the Nonadmitted and Reinsurance Reform Act (NRRA), not to be confused with (although it often is) the National Risk Retention Association, also "NRRA." This Act is a part of the Dodd-Frank jumble. It was actually intended to be something good and helpful to the surplus lines insurance industry in the United States and could have been so if not for the fact that implementation was left to the states and not laid out by the Act.

The goal was to eliminate the longstanding, confusing morass of individual state surplus lines tax laws. These contradictory and complex laws have made placing surplus lines insurance a nightmare. Some interpret captives as falling under surplus lines law, although that is not specific. The NRRA said that the tax is to be collected only by the "Home State" of the risk and can be reallocated to other states using a formula to be determined. That is the killer. The states are so far unable to determine how to do this allocation. The result has been for many states to declare that if your headquarters, undefined, are in their state, taxes are paid there. What is meant by "headquarters"? Is it where the most employees are located? Where the biggest premium is generated? Where the chief executive officer works? Where the firm is incorporated?

This position has caused much headache, confusion, formation of groups advocating solutions, and general trauma. Several lawmakers have stated that the law was never intended to apply to captives. Too late. Several captives have redomiciled or formed new branches in order to attempt to comply with the majority interpretation. Those doing so won't go back no matter what is ultimately determined to be the correct position. Litigation? Probably so.

Make no mistake. This is all about the money. Many of the states are interpreting captives as surplus lines companies and seeking the appropriate tax. In some cases, this can be mid to high six figures. Getting it right is important.


All of this tax assault does not change the basic principles as you choose a domicile for a new formation or redomestication. If 35 states are domiciles, there may be 10–12 knowledgeable regulators. The regulations in many of these states are not well drawn or were drawn by a small group seeking captives for their own narrowly defined interests. Some become domiciles when the legislature, the executive branch, or department regulators don't support the idea. With the aforementioned tax conundrum, "NRRA," the captive owner may be forced to analyze some tough decisions. Do I move to my "headquarters" state even though it doesn't like captives, it doesn't know how to properly regulate them, and my service providers aren't located there to avoid a big tax, or do I stay where I am and pay a bigger tax? That's a tough call. Get help.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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