There are numerous benefits to owning your own Reinsurance Company...
...many of them we have touched on in previous months. This month we want to focus on some of the preferential tax benefits that Reinsurance Companies are able to take advantage of.
Reinsurance companies are subject to United States taxation even though they are domiciled outside the US. Tax codes allow foreign insurance companies to elect to be treated as domestic insurance companies. Due to the nature of the business and industry, insurance companies are allowed several unique taxation rules. One of these is the allowance of a Reinsurance Company to grow accrued premiums tax-free and only pay taxes on the investment income. Aside from the tax savings enjoyed by Reinsurance Company owners, the greater benefits lie in the endless opportunity for investment income.
Owners of Reinsurance Companies are permitted to take out loans on the surplus and pay interest back to the Reinsurance Company. There are no taxes associated with the surplus borrowed. The interest paid on the loan goes back into the Reinsurance Company and can be invested as you see fit, as can the rest of the surplus. This allows all kinds of investment opportunities for the money and opens up countless possibilities for the creation of investment income for your Reinsurance Company. Additionally, through certain providers, you can borrow the unearned reserves accrued in a Reinsurance Company and if you put up a Letter of Credit (LOC) all of the reserves can be borrowed.
Once income is finally taken from the Reinsurance Company personally, you are only required to pay up to a 20% tax if your Annual Gross Income is greater than $450,000 or 15% if your Annual Gross Income is less than $450,000. The interest earned is also not subject to ordinary taxation. See the below tax table for an example.
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Investment income Tax rate
$50,000 15% of investment income
> $50,000 < $75,000 $7,500 + 25% of I. I. > $50,000
> $75,000 < $100,000 $13,750 + 34% of I. I. > $75,000
> $100,000 < $335,000 $22,250 + 39% of I. I. > $100,000
> $335,000 $113,900 + 34% of I.I. > $335,000