A FINC, or a Financial Interest Clause, is the insurance equivalent of a magic wand: wave it at a placement and all the regulatory issues surrounding admitted insurance simply evaporate ... just like that. This article, from Marsh, illustrates yet another reason (tax) why a FINC is usually evidence of wishful thinking, not a planned and structured approach to multinational programmes. As the IUA guidance referred to in the Marsh article makes clear, an insured parent must have an actual financial interest in its uninsured subsidiary for a FINC to work. The FINCs I am asked to look at often state that this interest exists, but saying that an interest exists - and being sure that that interest actually exists - are two very different things. There is a common misconception that an insured parent automatically has a financial interest in its uninsured subsidiary, by virtue of holding shares in that subsidiary. This is not the case, at least under English law, because a shareholder has no direct share in the assets of a company - a shareholder has the entitlements given by the constitution of the company whose shares it holds, and nothing more, and those entitlements are rarely sufficient to constitute the financial interest necessary for a FINC to work properly.
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When the concept of captive insurance first began, there was a strong tax incentive for American companies to form captives in offshore domiciles that did not tax the captive’s income. This allowed the income of the captive to accumulate outside of the United States without current taxation of its income. From the 1960’s through the 1980’s, the United States adopted various regimes for the taxation of the income of non-US subsidiaries of American corporations, such as the controlled foreign corporation (CFC), and passive foreign investment company (PFIC) rules. As these emerged, the tax advantage of captive insurance shifted away from the deferral of tax on the captive’s income, and towards the differential between the captive’s right to deduct loss reserves, and parent’s inability to deduct losses until the “all events” test is met. The tax advantage shifted away from offshore captives to captives formed within the U.S., so that ultimately the U.S. allowed foreign insurers that meet certain ownership tests to elect under Section 953(d) to be taxed as if they were domestic companies. This election is typically beneficial for captives that are part of a group in which the parent is a U.S. company, although non-U.S. captives are still beneficial for most U.S. companies that are subsidiaries of non-U.S. parents.
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Recently, Praveen Sharma mediated a debate regarding the financial interest cover (FINC) clause at the Axco Global Insurance Conference 2024 in London. Read about the development of the FINC clause and its correct use for multinational companies in this article. #multinational #RiskManagement
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Author/ Mentor / Trainer/ Liability insurance gardening/ Liability insurance consulting across diverse domains.
8moThe ruling in India, by the Income Tax Appellate Tribunal in in M/s Adidas India Marketing (P.) Ltd. Vs. Income Tax Officer, ITA No. 1431/Del/2015 (July 29, 2019), offers useful insights. Given below are some excerpts from the ruling. “The Adidas AG has paid premium separately for the Global insurance policy and no part of the same has been allocated to the assessee or reimbursed by the assessee. Under the Global insurance policy, which was entered between Adidas AG and Zurich insurance, privity of contract was between the said two parties, without assessee being a party” “Further, we agree with the contention of the Ld. counsel of the assessee that insuring the financial interest in the subsidiary by M/s Adidas AG is not a tax avoidance scheme and the policy was taken to cover the contingent losses that may or may not arise in future. We find that M/s Adidas AG has paid premium in respect of the policy from time to time and also paid tax in Germany in relation to the amount in question of insurance claim. We reject the observation of the lower authorities alleging that colourable device was adopted by the assessee for evading taxes in India.” #FINC #financialinterestclause