IRS Proposes Rules to Limit Reinsurance by Hedge Funds

The IRS recently issued a notice of proposed rulemaking that, if approved, could make it more onerous for hedge fund managers to establish or operate offshore reinsurance companies.  Although hedge fund managers have taken advantage of a carve-out in the rules regarding Passive Foreign Investment Companies and set up reinsurance structures in no-tax and low-tax offshore jurisdictions, the proposed regulations seek to limit that practice by drawing a distinction between companies engaged in “active” reinsurance and those that are merely vehicles used to defer or reduce the tax that would otherwise be due with respect to investment income.  This article summarizes the proposed regulations.  For more on the intersection of hedge fund management and reinsurance, see “Considerations for Hedge Fund Managers Evaluating Forming Reinsurance Vehicles in the Cayman Islands,” Hedge Fund Law Report, Vol. 7, No. 33 (Sep. 4, 2014); and “How Can Hedge Fund Managers Use Reinsurance Businesses to Raise and Retain Assets and Achieve Uncorrelated Returns? (Part Two of Two),” Hedge Fund Law Report, Vol. 6, No. 3 (Jan. 17, 2013).

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