Belgium may benefit from US tax on TLP profits
UK/BELGIUM - Policy Selection Limited (PSL), the fund management group behind the Assured Fund which invests in traded life policies, is to move the administration of the fund to Belgium to limit the impact of new withholding tax rules introduced by the US.
The US Internal Revenue Service (IRS) announced In May that under new rules the capital gains on traded life policies (TLPs) are classified as US source income and will be subject to a 30% tax on the profit. It is expected the tax will apply to policies purchased after 26 August 2009.
Andrew Walters, finance director of PSL, pointed out the only real way around the withholding tax rules is to make use of the double taxation regime and the agreements the US has in place with countries such as Ireland, Luxembourg and Belgium.
PLS currently manages around $420m in assets from its base in the Cayman Islands, but as the Caymans do not currently benefit from a double taxation treaty with the US it has developed a "watertight eurozone structure which will effectively ensure that withholding tax will not impact on returns paid to Assured Fund investors".
Walters revealed a number of TLP companies are planning to move locations, with many choosing Ireland. However, he pointed out that to qualify for the double taxation treaty firms have to set up an entirely new vehicle and ensure 50% of investors are from the US and 50% the rest of the world.
Because the Assured Fund has no US investors and instead is mainly funded by European investors such as Swiss and Nordic banks, PSL has arranged to move the administration from the Caymans to Belgium in a 100%-owned subsidiary company to "ring fence" returns from US tax legislation.
PSL will transfer the beneficial ownership of the assets from its custodian in the Isle of Man to a Special Purpose Vehicle (SPV) in Brussels, this means that under the double tax treaty the US tax authorities will pay the gross face value of the policy offshore on the understanding it will be subject to Belgian tax law.
Walters said the firm had spent 18 months working on the solution as it wanted a structure that would "act as an over arching umbrella, applicable to Assured Fund as a whole rather than one based on the tax status of individual investors which some other funds have proposed".
He added the firm had chosen Belgium because the company "had already made contact with structural planners there who could assist with the move", although Luxembourg would have been another option if the connection with Belgium had not already been established.
Details of how the 30% tax will be enforced have not yet emerged, but Walters pointed out that a tax on profits - which could already be jeopardised if the policyholder lives longer than expected - would "severely limit any return and indeed may leave the buyer out of pocket".
TLPs appear to be a growing asset class for institutional investors, with some pension funds such as PME investing in them as early as 2006, as the return is always guaranteed because the policyholder has to die at some point. (See earlier IPE article: Longevity risk higher on TLP derivatives - MPL)
They are essentially a second hand market for US life assurance policies, where the individual holder - in the case of PSL those aged between 75-85 - sell the policy for more than the surrender value but less than the face value. The buyer then continues paying the premiums until the policyholder dies and they receive the full sum assured.
Walters added that 2010 could be a "real flyer" for the market as institutions start to move back out of cash following the financial crisis. In particular he highlighted the firm intends to "address pension funds a bit more" as TLPs have the potential to "dovetail" with pension funds' need for longevity instruments. (See earlier IPE article: TLPs could be 'foundation' for wider mortality market)
To read more about TLPs as an asset class see the October issue of IPE.
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