8181 / What are the state-level taxes that may apply to a captive entity? What are the corresponding state tax benefits that a captive may realize?

The captive will be regulated as an insurance company in the state in which it is formed, just as any other insurance company. Most states impose a premium tax on the value of the premiums collected by the captive.

Despite this, the premium taxes imposed by many states are highly favorable to captives. For example, Vermont, which is one of the largest U.S. markets for captive insurance companies, collects a premium tax of 0.38 percent on the first $20 million of insurance premiums collected by the captive in the state. The second $20 million of insurance premiums is taxed at 0.285 percent, the third $20 million is taxed at 0.19 percent and anything above $60 million in premiums is taxed at 0.072 percent.¹ The total amount of premium taxes that must be paid by a captive in Vermont is capped at $200,000 annually.² Vermont also imposes a minimum premium tax of $7,500.³

Some states also impose a self-procurement tax on the insured entity that procures insurance directly from non-admitted insurance companies. These taxes also vary from state to state. In Florida, for example, an insured entity that independently procures its insurance is subject to a self-procurement tax of 5 percent of the gross premiums paid.⁴ Florida also charges a 0.3 percent service fee, increasing this tax to 5.3 percent.⁵

However, assuming that the captive is formed to serve a legitimate insurance-related purpose, many state-level tax benefits can be realized. Generally, the captive will not be subject to state-level income tax in the state in which it is domiciled. Though many of these states will continue to apply a premium tax to the premiums collected by the captive within the state, these tax rates are typically much lower than a state’s income tax rates.

Further, even if the captive is subject to state income tax requirements, the deduction for premium expenses outlined in Q 8173 is usually available at the state tax level, as well, assuming the arrangement qualifies as an insurance transaction. (See Q 8175.)