Potential impact of proposed regulations on cell companies
In September 2010, the Internal Revenue Service (IRS) issued proposed regulations regarding the classification of an individual series of domestic series limited liability company (LLC), a cell of a domestic cell company, and a foreign series or cell that conducts an insurance business. Many captive domicile statutes provide for the chartering of a legal entity commonly known as a protected cell company, segregated account company, or segregated portfolio company (cell company). The proposed regulations apply to domestic series or cells and foreign series or cells which conduct an insurance business for federal tax purposes. The proposed regulations do not apply to foreign series or cells not in the insurance business.
The proposed regulations, if applicable to the series or cell, provide that a series or cell is generally treated as an entity separate and distinct from other series or cells within the same organization. Owners of a series or cell should consider the impact of the proposed regulations on their ownership interest, taking into account the potential for separate entity treatment and related tax benefits and/or concerns. For example, the proposed regulations allow for U.S. owners of foreign cells conducting an insurance business the ability to make certain elections for federal tax purposes without detriment to other cells within the cell company. Separate entity treatment for a foreign cell can also cause the current taxation on the cell's earnings via the Subpart F regime for controlled foreign corporations (CFC’s). These earnings may have been deferred from current taxation prior to issuance of the regulations.
Given the proposed regulations, current and potential new series or cell owners should carefully consider the tax implications and planning opportunities available for their investment. We would be happy to meet with you to discuss how your business may be affected by these proposed regulations.
to read more about the proposed regulations.