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HMRC internal manual

International Manual

Controlled Foreign Companies: The CFC charge gateway chapter 7 - captive insurance business: introduction

Captive insurance companies are insurance companies established with the specific objective of financing risks emanating from within their own group. However, they can also be used to insure risks of the group’s customers as well (for example an extended warranty sold with a washing machine).

It is common within the insurance industry to refer to reinsurance companies as captive insurers, even though they will generally be underwriting risks which originate from unconnected third parties. For the purposes of the Chapter 7 guidance we refer to captive insurance companies as CFCs whose profits fall within Chapter 7; the profits arising from the following activities

  • the insurance (and reinsurance) of risks originating within a connected UK group company, and
  • the insurance of risks with UK resident persons who have bought goods or services from a UK company connected with the captive.

Captive insurance companies resident within beneficial tax regimes have always been a concern for fiscal authorities and they were a primary driver behind the introduction of the old CFC regime in 1984. There are commercial reasons supporting the creation and use of captive insurance companies but a key driver, especially for those resident within such beneficial tax regimes, will be the tax advantages that can be obtained. These advantages include:

  • the UK insured company is likely to obtain a tax deduction against its profits for the premium it pays to the CFC, and
  • the income from the premium received and income arising from the investment of that premium, is likely to either be subject to a nil, or low, rate of taxation in the CFC’s territory of residence.

A further advantage (albeit one linked to the retention of an insurance risk) of a captive insurance company is that the group retains the funds it uses to pay the premium. This retention benefit would not normally arise when the premiums are paid to a third party insurer.

Chapter 7’s basic rule applies to underwriting profits generated from insurance premiums received from certain UK contracts of insurance and in addition the profits generated from the investment of those premiums. The basic rule is adapted for captive insurance CFCs resident in an EEA territory, so that it only applies to the extent there is no significant UK non-tax reason for entering into the contract of insurance arrangement.