Foreign captive insurance companies ("Captives") have gained popularity as a legitimate vehicle to address insurance challenges confronting US based companies. There are approximately 700 Captives licensed by the Cayman Islands Monetary Authority and over 1,500 insurance companies licensed by the Bermuda Monetary Authority.

Industry players will already know that Captives can elect to be treated as a U.S. corporation for U.S. federal tax purposes under Section 953(d) of the Internal Revenue Code. However, as the tax transparency regimes become more global and far reaching, Captives must consider how FATCA and the CRS address the 953(d) election.

Regarding FATCA, on July 1, 2014 the U.S. Foreign Account Tax Compliance Act ("FATCA") and its UK equivalent (for Cayman, Bermuda and other Crown Dependencies and Overseas Territories) ushered in unprecedented transparency on taxpayers' accounts with "Reporting Financial Institutions" and "Participating Financial Institutions".  And more recently, on October, 16 2015 The Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations, 2015 (the "CRS Regulations") were published. The publication of the CRS Regulations is a crucial precursor to the soon approaching date of January 1, 2016 when the CRS takes effect - promising even greater transparency between the tax authorities of nearly one hundred other jurisdictions.

This table summarizes the entity classification possibilities under FATCA, UK FATCA and the CRS.  

Entity Classification
of Offshore Captives

Summary of condition

Recognition of classification




  1. U.S. Corporation

Election under section 953(d), Internal Revenue Code




  1. Financial Institution
  1. Specified Insurance Company

Insurance company (or the holding company of an insurance company) that issues, or is obligated to make payments with respect to, a Cash Value Insurance Contract or an Annuity Contract.

See: CRS. Section VIII: Defined Terms. §A.8




  1. Investment Entity

Professionally managed and at least 50% of its gross income is attributable to investing, reinvesting, or trading in Financial Assets

CRS. Section VIII: Defined Terms. §A.6




  1. Non-Financial Foreign Entity
  1. Passive

NFFE that is not an Active NFFE

(CRS. Section VIII: Defined Terms. §D.8)




  1. Active

There are several alternative types but the most common type is where less than 50% of the Entity's gross income is passive income and less than 50% of its assets produce or are held for the production of passive income

(CRS. Section VIII: Defined Terms. §D.9)






As you can see from the above table, every Captive which made a section 953(d) election must now give further consideration to its classification under the CRS.  Captives classified as a Specified Insurance Company or Investment Entity under both the US and/or UK FATCA and CRS must comply with local CRS- enabling laws and regulations.  The CRS prescribes detailed due diligence, record keeping and reporting obligations.  And, the Captives directors have ultimate responsibility for establishing and maintaining the necessary arrangements/policies and procedures, as well as responsibility for supervising any delegations to the principal point of contact with the competent tax authority or insurance manager, or other service provider.


  • Captives insuring risks overseas.
  • Captives (and insurance and reinsurance arrangements) in effect on or after January 1, 2016.
  • Insurance and reinsurance companies incorporated in the Cayman Islands are in scope either as an FFI ("Foreign Financial Institution") or NFE ("Non-Financial Entity").
  • Reporting Financial Institutions that are either:
    • (a) an Investment Entity; or
    • (b) a Specified Insurance Company.
  • Non-Reporting Financial Institutions (though rare).


  • Many offshore Captives are considered NFEs.
  • Classification is crucial to managing ITC obligations – deciding whether (and in what way) an offshore Captive is a Reporting Financial Institution with obligations under the applicable International Tax Compliance regimes starts with the classification process.
  • The Captive's financial counterparties will require the Captive to provide a withholding certificate and/or self-certification as to the Captive's entity classification and tax status. Counterparties may be forced to impose FATCA withholding tax and/or decide to terminate business with a non-cooperative Captive.
  • If the Captive is a Reporting Financial Institution it will have complex due diligence and reporting obligations under the CRS and must implement the necessary compliance arrangements.
  • The Cayman Islands International Tax Compliance (ITC) Regulations regarding the US and UK IGAs establish a number of criminal offences for non-compliance.
  • The Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations, 2015 (now in effect) speaks to administrative penalties but does not impose criminal offences. It is anticipated that criminal offences will be addressed in a revision of the Tax Information Authority Law.


  • Just as we are all attempting to digest the scope and application of FATCA in relation to Captives, along comes CRS!
  • Any Captive that has made a section 953(d) election must now carefully consider its entity classification under the CRS.
  • Accurate classification is imperative to avoid falling foul of local CRS-enabling laws and regulations!
  • High-level knowledge of the requisite policies and procedures under the CRS is imperative! 
  • Be pro-active! Take steps to learn each captive's status individually (under FATCA and CRS).
  • Not all captives can be assumed to be the same! FATCA may impose withholding, reporting and other obligations depending upon the specific taxpayer circumstances therefore captives should still evaluate their business operations to determine if they qualify as some other category of FFI (for example - depository institutions, custodial institutions, investment entities, and certain holding companies and treasury centers).
  • Possible penalties for non-compliance include criminal liability and/or administrative penalties.    

The ITC team at Sinclairs International Tax Compliance Services Ltd welcomes inquiries for a more in depth discussion on how the classification of Captives may impact your business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.