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Insurance-linked securities: final draft regulations

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The government has published final versions of the two sets of draft regulations setting out the regulatory and tax framework for new ‘multi-arrangement insurance special purpose vehicles’ (mISPVs), allowing insurance-linked securities (ILS) to be domiciled and traded in the UK. The regime will include a corporation tax exemption for reinsurance activity of the mISPVs and a withholding tax exemption for investors.

The final regulations follow two rounds of consultation held during 2016. HM Treasury has also published a response document to the November 2016 consultation on the first draft of the regulations, explaining where changes have been made.

Insurance-linked securities are used by insurance and reinsurance firms to transfer specified types of risk to the capital markets. The regulatory framework is contained in the Risk Transformation Regulations 2017. These introduce a new regulated activity of ‘insurance risk transformation’, using a corporate structure for mISPVs involving ‘protected cell companies’ (PCCs). These will be private companies limited by shares. Public offerings for investment in ISPVs will not be permitted. Directors of these companies will be required to exercise reasonable care, skill and diligence to ensure compliance with the regulations. PCCs established under these regulations will only be available for use as authorised mISPVs.

The taxation rules for ISPVs are contained in the Risk Transformation (Tax) Regulations. These will have the status of ‘qualifying transformer vehicle’ (QTV), meaning:

  • insurance risk transformation activity of the QTV is not subject to corporation tax;
  • debt and equity payments from ISPVs will be exempt from withholding tax, making them taxable on UK investors as normal investment income and on overseas investors according to their home country regime;
  • the distribution of assets from a QTV must take place within 90 days from the date on which liabilities under an insurance-linked securities contract are satisfied; and
  • QTV tax treatment will only be refused for a whole PCC if the company itself, rather than a single cell, has incurred penalties for serious matters, including deliberate inaccuracies or repeated failures.