The Impact of the Corporate Transparency Act on Companies in a Captive Insurance Structure

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The Corporate Transparency Act (CTA), which went into effect on January 1, 2024, requires certain domestic entities and foreign entities operating in the United States to report beneficial ownership information (i.e., information about the individuals who directly or indirectly own or control the entity) (BOI) to the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). There are several categories of entities that are exempt under the CTA from filing a Beneficial Ownership Information Report (BOI Report), including insurance companies and their wholly owned or wholly controlled subsidiaries.

Captive insurance companies likely qualify for the insurance company exemption, and companies that are wholly owned or wholly controlled by captive insurance companies qualify for the subsidiary exemption. However, there is no “upward” exemption for parent companies of exempt entities and, therefore, holding companies that own captive insurance companies are not exempt from filing a BOI Report unless the holding company itself qualifies for another exemption.

CTA Overview 

There are two categories of reporting companies under the CTA: “domestic reporting companies” and “foreign reporting companies.” 

1. A “domestic reporting company” means any corporation, limited liability company, or other similar entity created by the filing of a document with a secretary of state or any similar office.
2. A “foreign reporting company” means any corporation, limited liability company, or other similar entity that is formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or any similar office.

The term “similar entities” in the above definition of reporting company almost certainly includes limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, considering that these entities are generally created by a filing with a secretary of state or similar office. Accordingly, each of the foregoing entities, as well as corporations and limited liability companies, are required to file BOI Reports. However, sole proprietorships, general partnerships, and certain other types of trusts are not required to file BOI Reports, even if they register for a business license or similar permit that does not create the entity, because they are not created through a filing with a secretary of state or similar office.

The CTA imposes different filing deadlines for new and existing reporting companies: 

1. Reporting companies created or registered to do business in the United States before January 1, 2024 have until January 1, 2025 to file an initial BOI Report. 
2. Reporting companies created or registered in the United States on or after January 1, 2024, and before January 1, 2025, have 90 calendar days from the notice of the creation or registration to file an initial BOI Report. 
3. Reporting companies created or registered in the United States on or after January 1, 2025 will have 30 calendar days from the notice of the creation or registration to file an initial BOI Report. 

Reporting companies must also update previously filed BOI Reports if any information changes regarding the company itself or its beneficial owners and to correct any inaccuracies in previously filed BOI Reports.  
 

Exemptions Under the CTA

There are 23 exemptions under the CTA, most of which apply to larger or more highly regulated entities. An entity that qualifies for one or more exemptions is not required to file a BOI Report. However, if a reporting company filed an initial BOI Report and then later qualifies for an exemption, it must file an updated BOI Report indicating its newly exempt status. 

The insurance company and subsidiary exemptions are most relevant for companies established within a captive insurance structure.

Insurance Company Exemption

An entity qualifies for the insurance company exemption if it is an “insurance company” as defined in Section 2 of the Investment Company Act of 1940, which provides as follows:

“Insurance company” means a company which is organized as an insurance company, whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies, and which is subject to supervision by the insurance commissioner or a similar official or agency of a State; or any receiver or similar official or any liquidating agent for such a company, in his capacity as such. 

FinCEN has not specifically addressed whether or to what extent certain captive insurance companies, which FinCEN has recognized can vary significantly in structure and size, might be able to claim the insurance company exemption (or any other exemption under the CTA). One commenter on the proposed FinCEN BOI rules criticized the language in the insurance company exemption for potentially applying to “high-risk” captive insurance companies, which the commenter argued would enable such companies to avoid reporting their beneficial owners to FinCEN. The commenter specifically pointed to enforcement actions taken by the IRS against “abusive micro-captive” insurance arrangements. While FinCEN acknowledged these concerns, it emphasized that the scope of the insurance company exemption was specified by Congress in the CTA. At least for now, FinCEN adopted the final rule without any change to the language of the insurance company exemption. However, FinCEN did note that it may further consider captive insurance companies in connection with the study of exempt entities required under the CTA.  

A captive insurance company should be considered an “insurance company” under Section 2 of the Investment Company Act of 1940 because (1) it is organized and operates as an insurance company, (2) its primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies, and (3) it is subject to supervision by an insurance commissioner. Applying the insurance company exemption to captive insurance companies is also consistent with public policy. The CTA is aimed at bringing transparency to entity ownership, thereby helping the United States government protect the financial system from being used for illicit activities. The CTA’s reporting requirements generally apply to smaller, more lightly regulated entities that are less likely to be subject to any other BOI reporting requirements. By contrast, the CTA exempts certain categories of larger, more heavily regulated entities because they already provide BOI to regulatory authorities through means other than the CTA.

Captive insurance companies are regulated by and must report their BOI to an insurance commissioner. As is the case for many of the other categories of exempt entities, requiring BOI Reports from captive insurance companies would neither serve the public interest nor help further key government objectives.

Unless and until Congress or FinCEN provide further clarification or otherwise amend the language of the insurance company exemption, it should apply to captive insurance companies in the same manner as traditional insurance companies. Accordingly, captive insurance companies should not be required to file BOI Reports so long as they maintain their insurance operations and license. If a captive insurance company decommissions (i.e., surrenders its insurance license but continues to exist as a holding company), it would have 30 days from the effective date of its decommissioning to file an initial BOI Report.

Subsidiary Exemption

Subsidiaries of certain types of exempt entities may also be exempt from BOI reporting requirements. To qualify, a subsidiary’s ownership interests must be fully, 100% owned or controlled, directly or indirectly, by one or more exempt entities. If an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary exemption does not apply. Put differently, an entity cannot claim the subsidiary exemption if a non-exempt entity owns or controls any portion of its ownership interests.

The insurance company exemption is one of the categories of exemptions that triggers the subsidiary exemption, assuming the other exemption criteria are met. Thus, an entity that is 100% owned or controlled by one or more exempt captive insurance companies would be exempt from filing a BOI Report under the subsidiary exemption. But an entity that is partially owned by a captive insurance company and partially owned by another non-exempt entity would not be exempt from filing a BOI Report (unless the entity qualifies for another exemption independently). 

Further, the subsidiary exemption applies only to entities downstream of an exempt entity in an ownership structure. There is no “upward” exemption for parent companies of an exempt entity (for example, a holding company that owns only an exempt entity). Likewise, sister companies and other affiliates of exempt entities will not benefit from the subsidiary exemption and will be required to file a BOI Report unless they qualify for another exemption independently. Thus, a holding company formed to hold an interest in a captive insurance company must file a BOI Report under the CTA even though its subsidiary qualifies for the insurance company exemption (unless the holding company qualifies for another exemption independently). 

Regardless, captive insurance companies and their affiliates should carefully consider their potential reporting obligations under the CTA and should check with legal counsel on a case-by-case basis to make sure they qualify for an exemption.

The CTA is evolving, and further guidance is expected from FinCEN regarding BOI reporting requirements. Indeed, FinCEN has indicated that it may further consider captive insurance companies in connection with Section 6502(c) of the Anti-Money Laundering Act of 2020, which requires the United States Government Accountability Office to conduct a study of the effectiveness of the CTA and exemptions thereunder within 2 years of its effective date. It is also worth noting that there are several pending legal challenges to the constitutionality of the CTA, and legislative proposals aimed at the repeal the CTA have been introduced in both the United States Senate and the United States House of Representatives (though it is unclear whether either of these bills will move forward). 

Womble Bond Dickinson (US) LLP is actively monitoring ongoing developments regarding the CTA, including the pending legal challenges and legislative proposals. Should you have any questions about the CTA and how it could affect your business, reach out to any of the authors of this alert or your relationship attorney at Womble Bond Dickinson (US) LLP.