96-122

Response August 23, 1996

 

 

Request

July 16, 1996

 

XXXXX

 

Dear XXXXX

 

In advance of a planned company restructuring we are writing to confirm the appropriate treatment of certain of the transferred assets, specifically guaranteed association (“GA”) assessments.

 

Because state law in this area is generally silent, we would appreciate a written response from your office to support our position.

 

Background and Rationale for the Transfer

 

The XXXXX is a non-US insurer which issues participating policies in the United States through its US Branch. As part of our company’s restructuring we are planning to transfer this business to our wholly owned US subsidiary, the XXXXX. The effective date of the transfer will be December 31, 1996 (subject to regulatory approval).

 

US legislation places foreign-domiciled insurance companies at a complete disadvantage. As a result, our primary business objective for transferring the business to the XXXXX is to place the company on a level footing with US domiciled companies from both a tax and regulatory perspective. The transfer is being undertaken to strengthen the company’s ability to continue to deliver good, long-term value and superior service to our field associates and policyholders.

 

Method of Transfer

 

This transfer is being done through a bulk reinsurance agreement (without novation). Essentially the transaction is a tax free continuation of business in our subsidiary. All of the assets and liabilities of the XXXXX business are being transferred to this US company, including the guarantee association assessments, as set out in the capital and surplus agreement which forms part of the bulk reinsurance agreement.

 

Guarantee Association Assessments

 

When guarantee association assessments are paid, they are set up as an asset in the company’s records because of the value they have to the company, as a credit against future premium tax. State statute generally recognizes this as they allow the unamortized portion of the GA assessment to be shown as an asset. Further, a common law principle provides that assets are transferable, unless specifically excluded as specified in the contract. On this basis, there should not be any limitation to the transferability of the guarantee association assessments to our US subsidiary.

 

Therefor, once the transfer of the assets is complete, the guarantee association assessments will be available as an offset against future premium tax for the US subsidiary. Also, since the company’s liabilities will also be transferred, future guarantee association assessments will be paid from the US subsidiary.

 

In essence we are continuing our existing US Branch life insurance business through a wholly owned US company, and the logical outcome is that the guarantee association assessments follow the business that is transferred to the US subsidiary.

 

Premium Tax Returns

 

As a result of this transfer, 1996 will be the last year a premium tax return will be filed for our US Branch and the corresponding GA credit will be taken. In 1997 the foreign parent will be giving up its certificate of authority, and will not file for a premium tax return. Therefore, no further guarantee association credits will be taken.

 

However, the same business for the 1997 year will be reported through the US subsidiary, and accordingly the GA assessments will be taken as a credit on the US company’s premium tax return in 1997.

 

Summary

 

We would appreciate a written response from your office confirming our interpretation that on our planned transfer of XXXXX business to our wholly owned US subsidiary the guarantees association assessments would also be transferred to our wholly owned US subsidiary and be available as a credit on future premium tax returns.

 

If you have any questions please contact me directly at XXXXX.

 

Sincerely,

 

XXXXX

 

 

August 23, 1996

 

XXXXX

 

Advisory Opinion - Insurance guarantee association credits

 

Dear XXXXX

 

We have received your request for guidance as to the disposition of the guarantee association credits of parent company whose operation is transferred to a wholly owned subsidiary. Although Utah law does not specifically address this question, we offer the following guidance.

 

Section 31A-28-113 of the Utah Code addresses credits for assessments paid. Under that statute, an insurer is entitled to offset its Utah premium tax liability to the extent of 20% of the amount of the assessment for each of the five calendar years following the year in which the assessment is paid. If offsets exceed premium tax liability, the offsets may be carried forward to offset liability in future years. However, if the insurer ceases doing business, all uncredited assessments may be credited against its premium tax liability for the year it ceases doing business.

 

Section 31A-28-113 does not contemplate the transfer of credits from one taxpayer to another. It does, however, allow a company that ceases to do business in Utah to avoid the 20% credit cap placed on on-going insurance operations. Therefore, we suggest that the parent company take all of its available credits in the year it ceases to do business.

 

If we can be of further assistance, please let us know.

 

For the Commission,

 

Alice Shearer,

Commissioner