Sidley Austin LLP, an international business law firm, said Thursday that the IRS had issued guidance concerning cell companies. Certain protected cell companies, say proposed regulations that appeared in the Federal Register on Wednesday, and each of their underlying cells, would be treated as separate entities for federal income tax purposes.
The update stated, “Different rules would apply based on whether a cell qualifies to be taxed as an ‘insurance company’ and not, if not, whether the cell is formed in a U.S. (‘domestic’) or non-U.S. (‘foreign’) jurisdiction.”
Both domestic and foreign cells with more than half of their activities qualifying as insurance or reinsurance, including annuities, for federal income tax purposes would have to be treated as separate corporations taxed as insurance companies.
There is a grandfather rule, and companies should be aware that grandfathered status will be lost once a company has a 50% or greater ownership change.
Comments are being solicited and should be filed by December 13, 2010.