How to choose a captive domicile

There are some domiciles which can be ‘shoehorned’ into most business needs, however this does not necessarily lead to the most efficient outcome. Many captive owners remain in blissful ignorance of a better solution but may experience friction over time from increased capital requirements, asset restriction, capital loadings or delayed regulatory approvals.

Local managers and consultants are specialist in their domicile however they do not always have sufficient exposure or experience with the alternatives. It is for this reason that domicile assessments should be undertaken by experienced multi-domicile specialists.

The OECD/G20 inclusive framework on Base Erosion and Profit Shifting includes several considerations relative to domicile selection, not least; Country-by-Country Reporting (CbCR) and alignment to substance. These mean that not only must the parent be comfortable to report a subsidiary (the captive) in the selected domicile, but that it should also establish a suitable rationale regarding related substance such as seat of control as location of related business operations.

This has led to the increased in consideration in, and establishment of, captives in ‘home’ domiciles such as the Nordics or France. To date the UK has not established an appropriate framework for most captives.    

Once established, your captive will need support. Resources include captive managers, banking, investment management services, compliance, auditors, actuaries, lawyers and even in domicile independent directors. Having these service providers in the domicile will help not only to ensure relevant expertise but also to support local mind, management, and control.      

Another essential stakeholder is the regulator. Their experience and flexibility will be key to the success of your captive. It is one thing to be an experienced insurance regulator however it is important that they understand captives and provide accessible resources to respond to matters arising in a timely and proportionate manner.    

There are domiciles which have created industry specialisations; an example is the Cayman Islands with healthcare. It is true that other domiciles may also have capability however, there can be value in alignment as service providers and the regulator will have a better understanding of your business. The opportunity to ‘connect’ with peers at captive events is also valuable.

Programme design

The program structure is an important consideration; some risks require the captive to be in a specific country or region, such as US Employee Benefits requiring a US captive, or European direct policies requiring a European insurer. The regulatory framework may also be relevant with some low frequency, high severity risks benefiting from a domicile which permits a higher equalisation reserve.

Once you’ve identified the suitable program strategy this must be cross referenced with available captive structures; There are a number variants available, however not all domiciles have the legislation to permit them. Examples include protected and incorporated cell structures, group captives and risk retention group. Even where they’re permitted, there needs to be a suitable vehicle operated by a suitable sponsor.       

The regulatory regime and accounting treatment will be another important consideration in respect of regulatory solvency, capital, and reporting. These can vary considerably. Solvency II, used mainly in Europe, is one of the more onerous regimes and results in higher cost. For many, particularly larger captives, these costs are justified due to a balance of alignment to home domicile equivalency or the additional benefits such a domicile affords, not least the ability to issue direct policies for European risks. However, other domiciles may provide lower capital requirements and administrative costs where this isn’t required.

Tax?

Is tax a driver? It can be, particularly at an entity level, but often this becomes a mute issue on a consolidated group basis. For tax exempt organisations such as public bodies or charities, a captive may create an Unrelated Business Income Tax (UBIT) resulting in additional expense. Premium taxes may also be relevant.

UK IPT is payable at the same rate regardless of the captive’s location however for US risk there are various layers including; state taxes, self-procurement tax, federal excise tax and cascading, which could direct, alongside other factors, the preferred state. US Base Erosion and Anti-avoidance Tax (BEAT) is worth considering although often less relevant to the captive than to European insurers ceding US risk to a non-US captive.

The EU Mandatory Disclosure Regime (DAC6) and incoming OECD pillar 1 & pillar 2 will have greater relevance. Tax is an important consideration but should not be the key driver in deciding where to domicile the captive.

In conclusion, there are a variety of considerations: financial, strategic, and operational. The selection of a domicile should be a considered decision formed to meet the needs of the parent and the captive in the short, medium, and long term.