Are payments to a Bermuda captive insurance company for New York risks subject to the section 1510 additional franchise tax on insurance corporations?

Plain-English summary

Mactras (Bermuda) Ltd. asked about CAPCO, a captive insurance company domiciled in Bermuda that does business only there. CAPCO is wholly owned (through an intermediary) by a U.S. parent, which pays CAPCO directly for professional-liability risks located in New York. The question: are those payments "premiums" subject to the section 1510 additional franchise tax on insurance corporations?

The Department did not need to reach the "premiums" question. Section 1510 imposes the premiums tax on an alien insurance corporation only if it is either (1) authorized to transact business in New York under a certificate of authority from the Superintendent of Insurance, or (2) a risk retention group as defined in Insurance Law section 5902(n). CAPCO is not authorized by the Superintendent of Insurance, and it does not appear to meet the risk-retention-group definition. Therefore CAPCO is not subject to the section 1510 tax at all, and whether the parent's payments are "premiums" for section 1510 purposes is moot.

What this means for you

Section 1510 reaches alien insurers only if authorized or a risk retention group

For an alien (non-U.S.) insurance corporation, the section 1510 premiums tax applies only if it holds a New York certificate of authority from the Superintendent of Insurance or qualifies as a risk retention group under Insurance Law section 5902(n).

An unauthorized Bermuda captive is outside section 1510

A Bermuda captive with no New York certificate of authority that is not a risk retention group is not subject to the section 1510 tax, regardless of where the insured risks are located.

The "premiums" question never has to be reached

Because the entity is outside section 1510, whether the parent's payments are "premiums" does not matter.

Common questions

Q: Is a Bermuda captive insurer subject to New York's section 1510 premiums tax?
A: Not unless it is authorized to transact business in New York by the Superintendent of Insurance or is a risk retention group. An unauthorized captive is not subject to section 1510.

Q: Does it matter that the insured risks are in New York?
A: No. If the captive is outside section 1510 because it is unauthorized and not a risk retention group, the location of the risks does not bring it in.

Q: Are the parent's payments "premiums"?
A: The question is moot, because the captive is not subject to section 1510 in the first place.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1510 (additional franchise tax on insurance corporations; gross direct premiums); section 1510(a) (alien insurer authorized by the Superintendent, or a risk retention group)
- Insurance Law section 5902(n) (definition of "risk retention group")

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a96_15c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (15) C
Corporation Tax
May 10, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C960108A

On January 8, 1996, a Petition for Advisory Opinion was received from Mactras (Bermuda)
Ltd., Victoria Hall, Victoria Street, P.O. Box HM 1826, Hamilton HM HX, Bermuda.
The issue raised by Petitioner, Mactras (Bermuda) Ltd., is whether the payments with respect
to New York risks made by the parent company to its captive insurance company ("CAPCO")
domiciled in Bermuda are "premiums" subject to the additional franchise tax on insurance
corporations imposed by section 1510 of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
CAPCO is a captive insurance company domiciled in Bermuda. It has no place of business
outside of Bermuda and does business only in Bermuda. The United States parent company holds
100 percent of CAPCO through an intermediary company. Payments are made directly from the
parent company to CAPCO. These payments are for risks covered by CAPCO pertaining to
professional liability. The risks are located in New York State.
Petitioner states that (1) the payments made by the parent to CAPCO are not tax deductible
for federal, state and city income tax purposes because CAPCO is not considered to be a "true
insurance company" by the Internal Revenue Service; (2) the payments are not treated as premium
income by CAPCO for income tax purposes; and (3) the payments are not subject to the federal
excise tax because they are not considered insurance premiums by the Internal Revenue Service.
Section 1510 of the Tax Law imposes an additional franchise tax on insurance corporations
and states that:
(a) ... every alien insurance corporation, other than such corporations transacting the
business of life insurance, (1) authorized to transact business in this state under a
certificate of authority from the superintendent of insurance or (2) which is a risk
retention group as defined in [section 5902(n) of the Insurance Law], shall, for the
privilege of exercising corporate franchises or for carrying on business in a corporate
or organized capacity within this state, and in addition to any other taxes imposed for
such privilege, pay a tax on all gross direct premiums, less return premiums thereon,
written on risks located or resident in this state ....
Section 5902(n) of the Insurance Law defines a "risk retention group" as:
any corporation or other limited liability association formed pursuant to the federal
liability risk retention act of 1986:

-2­
TSB-A-96 (15) C
Corporation Tax
May 10, 1996

(1) whose primary activity consists of assuming and spreading all, or any
portion, of the liability exposure of its group members;
(2) which is organized for the primary purpose of conducting the activity
described under paragraph one of this subsection;
(3) which:
. . .
(B) before January first, nineteen hundred eighty-five, was chartered or
licensed and authorized to engage in the business of insurance under the laws of
Bermuda ... and, before such date, had certified to the insurance commissioner of at
least one state that it satisfied the capitalization requirements of such state, except
that any such group shall be considered to be a risk retention group only if it has been
engaged in business continuously since such date and only for the purpose of
continuing to provide insurance to cover product liability or completed operations
liability;
. . .
(8) the name of which includes the phrase "risk retention group".
In this case, it is not necessary to determine whether CAPCO is an insurance corporation.
CAPCO is not authorized to transact business in New York State under a certificate of authority
from the Superintendent of Insurance. Further, it appears that CAPCO is not a risk retention group
pursuant to section 5902(n) of the Insurance Law. Therefore, CAPCO is not a corporation that is
subject to the additional franchise tax imposed on insurance corporations under section 1510 of the
Tax Law.
Since CAPCO is not subject to tax under section 1510 of the Tax Law, the question of
whether the payments made by the parent corporation to CAPCO, for risks located in New York, are
considered "premiums" for purposes of section 1510 is moot.

DATED: May 10, 1996

NOTE:

/s/
DORIS S. BAUMAN
Director
Technical Services Bureau

The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.