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Finance Act 2012

Chapter 7 – The CFC charge gateway - captive insurance business

175.Chapter 7 contains the rules that identify the profits of a captive insurance CFC that are within the scope of the CFC charge.

176.New section 371GA(1) outlines the basic rule for identifying a CFC’s profits that fall within Chapter 7. The basic rule charges both underwriting and investment profits arising from captive insurance business written with UK resident persons (whether connected to the CFC or not). The profits are captured under Chapter 7 and pass through the CFC charge gateway to the extent they are within the CFC’s assumed total profits and also arise from:

  • the CFC’s insurance business;

  • contracts of insurance falling within new section 371GA(2); and

  • where applicable, contracts of insurance where the CFC is resident in an EEA state and the insured (or original insured person) has no significant UK non-tax reason for entering into that contract.

177.New subsection (2) limits the scope of Chapter 7 to UK persons or UK permanent establishments that enter into contracts of insurance with the CFC. Profits are captured to the extent they are derived directly (or indirectly) from a contract of insurance (which is defined in section 371VA) entered into by a UK resident company or a non-UK resident company acting through a UK permanent establishment, that are connected with the CFC. A contract of insurance between the CFC and a UK resident person (who need not be connected to the CFC) is also included where the insurance relates to the provision of goods or services to that person. It does not include a case where those services are provided as part of an insurance business.

178.Subsection (2)(b) is targeted at situations where the insurance contract relates to the provision of goods or services to the UK resident person. For example, a UK retail group may establish a captive insurance company offshore. It may then market warranty plans, written by the captive insurance company, to UK resident persons at the point of sale of its retail goods. The profits from such insurance are within the scope of Chapter 7.

179.Profits are indirectly derived from a contract of insurance where, for example, the insurance is provided through insurance fronting arrangements. A particular instance would be where company A (a UK resident company) wants to enter into an insurance contract with its connected company B (a captive insurance CFC). If A enters into a ‘fronting arrangement’ with an unconnected insurance group whereby A enters into an insurance contract with company C (a member of the unconnected insurance group), who then reinsures the risk to company B, then B’s profits are within the scope of Chapter 7.

180.New subsection (4) excludes from Chapter 7 premiums paid under a contract of insurance by a connected UK resident company which has made a PE election under section 18A of CTA 2009 and where the premium is wholly brought into account for the purposes of determining an exemption adjustment.

181.New subsection (5) outlines the extent to which reinsurance contracts fall within Chapter 7. Amounts arising from reinsurance contracts are captured where the original contract of insurance would have fallen within subsection (2)(a) if it had been written by the CFC. This extends to cases where there is a chain of reinsurance between the original contract of insurance and the final contract of reinsurance.

182.By new subsection (6), new subsection (7) applies to a captive insurance CFC that is resident in an EEA state, provided the profits do not arise from the activities of a permanent establishment that the CFC has in a non-EEA state. Where subsection (7) applies, profits from an EEA resident captive insurance CFC will fall within Chapter 7 where they are derived from either:

  • a contract of insurance, for which the insured has no significant UK non-tax reason for entering, or

  • a contract of reinsurance, where the original insured has no significant UK non-tax reason for entering into the original insurance contract.

183.New subsection (8) defines UK non-tax reason for the purposes of subsection (7).

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