CHANGES to the taxation of foreign-company profits in the UK could have a knock-on effect on the local captive insurance industry. The reforms, being proposed by HM Treasury in conjunction with HM Revenue & Customs, would remove the distinction between EU and non-EU investments in Guernsey.

In addition, they might affect purely UK groups that have no foreign subsidiaries or profits.

Joanna Huxtable of Deloitte said that under the new rules it seemed likely that the profits of captives could be apportioned to a parent irrespective of the payment of dividend.

‘Captives may therefore lose the ability to retain even the limited profits currently permitted to be retained under the CFC-acceptable distribution policy,’ she said.

‘In these circumstances the measurement of apportionable income will be crucial and it is not yet clear how this will be determined.’

The impact will also depend on the extent of the exemption for genuinely active finance business. This is stated to cover certain income from banking, financial, insurance and property-investment business.

Mrs Huxtable said the question was whether this would embrace captive insurance arrangements.

‘This is probably unlikely, as the Revenue has indicated that it considers this highly mobile income which is easily detachable from the risks that underlie it,’ she said.

‘However, the extent to which they will be able to satisfactorily isolate this from exempt active insurance remains to be seen.’

She added that changes to the definition of control might result in Guernsey’s protected cell companies being treated as controlled ones for the purposes of the new regime.

The plans for a system to replace the outdated and unwieldy controlled foreign company regime have been published in an outline document.

Mrs Huxtable said it should be emphasised that the current paper was for discussion purposes only.

A period of consultation will follow, culminating in a paper being published by December.

‘Deloitte proposes to be active participants in this process and would be very happy to discuss these issues with all our clients on the island.’

It is not anticipated that any consequent legislation will be enacted before April 2009.