Insurance Bulletin, September 2017 Edition 2

1. REGULATION AND LEGISLATION

   Brazil: Concern at tax issues for admitted reinsurers in Brazil

   Recent changes to the Brazilian tax rules have significant implications for reinsurers which have established representative offices in Brazil.

   Under the Brazilian reinsurance regulatory framework, the market comprises three different categories of reinsurer - local, admitted and occasional - each with different licensing and capital set-up requirements and each subject to different risk cession rules and taxation requirements. There are currently approximately 16 local reinsurers in Brazil, 38 admitted reinsurers and 82 occasional reinsurers. Lloyd's of London has admitted reinsurer status.

   In Private Letter Ruling (PLR) No. 62/2017 dated 20 January 2017, the Brazilian Tax Authority (RFB) ruled that representative offices established in Brazil by non-resident reinsurers (so-called admitted reinsurers) should be treated for tax purposes in the same way as a reinsurer incorporated in Brazil (i.e. a local reinsurer). This was primarily on the basis of the RFB's decision that the representative offices of admitted reinsurers are to be considered a permanent establishment, and therefore subject to the same taxation applicable to local reinsurers. In the RFB's view:-

   "... the activities of representative offices do not have the character of mere brokerage, preparatory or ancillary services, but are characterized for tax purposes as equivalent to provision of services by local reinsurers."

   The local representative office of an admitted reinsurer is a service office, with all underwriting and claims handling being carried in the overseas office of the admitted reinsurer. Premium flows direct from the cedant insurers to the overseas entity and not via the account of the local representative. The practical effect of elevating the tax status of admitted reinsurers to local reinsurer is potentially very significant in terms of tax exposure.

   Each corporate entity is structured differently and will have its own unique tax arrangements; however, by way of illustration, under the usual regime, local and admitted players have been paying tax on the following basis since the opening of the Brazilian reinsurance market in 2008.

   Local reinsurers pay 45% corporate income tax plus 4.65% PIS/COFINS (i.e. federal contributions for funding social security) on gross premiums. The corporate income tax is comprised 15% tax on net profit plus an additional 20% by way of social...