A piece of U.S. regulation has been highlighted as potentially having an impact on catastrophe bond and insurance-linked security issuing entities. The insight published in this memo from law firm Cadwalader, Wickersham & Taft LLP discusses the FATCA provisions (FATCA stands for the Foreign Account Tax Compliance Act of 2009), regulation which aims to reduce U.S. tax evasion through foreign financial institutions and foreign domiciled entities.
FATCA is designed to reduce U.S. tax evasion by requiring these “foreign financial institutions” and foreign domiciled entities to provide information to the U.S. Internal Revenue Services about U.S. holders of their debt and equity interests and other “financial accounts,” or else be subject to a 30% withholding tax.
On the 8th of February the IRS issued some proposed regulations which provides more detail on when the FATCA regulations will take effect, who might be exempt and when withholding of funds could begin to take place. Cadwalader have published their client memo hoping to explain the impacts to foreign investment vehicles such as foreign hedge funds, foreign private equity funds, issuers of collateralized loan obligations and issuers of catastrophe bonds.
As catastrophe bonds and ILS are issued through foreign domiciled special purpose insurers and vehicles this FATCA regulation could be relevant to them. However the memo from Cadwalader suggests that further clarification from the IRS is required to be sure. They say:
It is unclear if catastrophe bond issuers are foreign financial institutions under the proposed regulations. In general, a catastrophe bond issuer may be treated as a foreign financial institution under the proposed regulations unless (i) more than half of its business during the calendar year is issuing, being obligated to make payments with respect to, or reinsuring the underlying policies, and (ii) the underlying policies are insurance, are not treated as having cash value, and are not securities for U.S. tax purposes.
We’re sure Cadwalader will update the memo as this becomes clearer. The memo details the expected timeframe for FATCA to become effective in and there is time for any concerned owners of foreign domiciled cat bond or ILS issuers to consult their law firms on the matter. Reading the memo from Cadwalader is a good start to understanding the impact this regulation could potentially have and you can access it here.