Choosing the right domicile for your captive can be overwhelming. There are more than 30 onshore and a myriad of offshore jurisdictions to consider, each with complex factors to weigh. Without a deep understanding of the key criteria and tradeoffs between onshore and offshore, you risk making a costly mistake that could limit the benefits of your captive.
When properly structured, a captive insurance company allows you to better manage business risks and costs compared to traditional commercial insurance. But the advantages go beyond that. As the owner of the captive insurer, you have control over policy writing and can benefit from tax deductions on premiums paid to your captive.
However, to enjoy these rewards, you must first choose where to domicile your captive. This decision requires a thorough analysis of onshore versus offshore domiciles. Getting it right means your captive will thrive, offering customized coverage and significant tax and cash flow benefits. Making a poor choice could lead to burdensome regulations, unfavorable taxes, or inadequate infrastructure that could cripple your captive's profitability.
The right domicile choice will provide a stable and supportive environment for your captive, unlocking the full benefits of lower costs, greater control, and tax optimization you sought by forming your own insurer.
When comparing onshore and offshore captive domiciles, one of the first things to consider is the jurisdiction's regulations and legislative environment. It is important to choose a domicile with a clear and captive-friendly regulatory framework that provides stability for your insurer.
Onshore jurisdictions like Vermont, Delaware, and Utah have well-established captive-enabling legislation that creates a mature regulatory climate. For instance, Vermont has been licensing companies under its captive statutes and regulations since 1981, with over 1,000 companies licensed during that time. This extensive experience has allowed Vermont to develop specialized infrastructure and a staff with extensive captive expertise.
In contrast, offshore domiciles are not regulated by U.S. regulatory bodies like the NAIC (National Association of Insurance Commissioners). This gives them more flexibility in designing captive regulations, but it also means less uniformity. Some offshore jurisdictions, like Bermuda, have decades of expertise similar to Vermont, while others are newer entrants still developing their frameworks.
It is important to choose a domicile that actively supports captives, rather than just tolerating them. Factors to consider include how quickly regulators respond to questions, whether legislation adapts to industry needs, and what captive structures are allowed. This information will help you avoid domiciles that only offer a limited captive experience.
Taxes are another important consideration when comparing onshore and offshore captive domiciles. While taxes should not be the sole determining factor, they do impact costs and profitability.
Certain onshore jurisdictions, such as Arizona and Nevada, do not impose premium taxes on captives, giving them an advantage over offshore domiciles that may tax premiums at rates of up to 2%. Some onshore domiciles also offer attractive tax structures for small captives under Section 831(b) of the tax code.
However, offshore domiciles often have no corporate income tax for captive profits. While the onshore advantage of no premium taxes remains beneficial, profits may face a higher tax burden compared to offshore domiciles. For example, Hawaii taxes captive profits up to 6.4%, whereas many foreign jurisdictions have zero tax on profits.
Another major factor in choosing a domicile is the quality of the jurisdiction’s captive infrastructure. You’ll be relying on local professionals for administration, legal, accounting, and other services. Mature domiciles like Vermont or Cayman offer extensive seasoned talent pools to tap into.
Newer domiciles may struggle to provide the breadth of experienced captive experts you’ll want for your team. Carefully vet the capabilities of management companies, law firms, and service providers before deciding on a domicile.
Also examine the domicile’s business environment. For example, Delaware offers well-established corporate laws familiar to many executives and directors. Bermuda and Cayman provide ready access to reinsurers and investment managers. Consider what infrastructure is most important for your captive’s operations.