By Ronald Gift Mullins
Any reinsurance company residing in a country on the Brazilian Tax Haven Blacklist is prohibited from establishing one of three types of reinsurers in Brazil.
Bermuda and the Cayman Islands along with 50 other countries are on this list.
Specifically, the prohibition refers to foreign companies with registered offices in tax havens which are defined as countries or territories that do not tax income or that tax income at a rate lower than 20%.
The regulation also includes countries whose domestic legislation provides for corporate shareholding or ownership secrecy. The current blacklist dates back to 2002. A revised list may be issued later this year to accommodate the new legislation enacted in June broadening the concept of a "tax and corporate haven" under Brazilian law.
New rules that come into effect on 1 January 2009 permit the Brazilian government to carve out any region within a foreign country/jurisdiction as a "tax haven" if the rules of such a specific region do not provide for public access to information regarding the company's structure or ownership by non-residents. “This could ultimately have an impact on places like the State of Delaware,” said Neil Montgomery, Partner, Felsberg e Associados, Sao Paulo, Brazil, “which are currently not blacklisted jurisdictions.”
The exclusion refers only to companies registering as an occasional (eventual) reinsurer in Brazil. The other two types of reinsurers--local and admitted--are not subject to this regulation. The occasional reinsurer is a foreign company that has no local presence in Brazil, only a local resident attorney-in-fact must be appointed. Further, the occasional reinsurer does not have to have on deposit at least $5m as is required for the admitted reinsurer.
Montgomery notes that the authorities' intention is to prevent a small occasional reinsurer that does not have offices in Brazil or substantial capital at risk, sweeping in and absorbing “a large part of the reinsurance business, at the expense of local and admitted reinsurers.”
Accordingly, Brazilian authorities have restricted occasional reinsurer’s operations. Rules require insurance companies to contract reinsurance from occasional reinsurers only up to 10% of the premium to be assigned for reinsurance. Further, occasional reinsurers are limited to 50% of the risk to be assigned as retrocession.
As of July 2008, these foreign reinsurers have been granted authority to operate as occasional reinsurers: Hannover Rückversicherung AG; Mapfre Re, Compañia de Reaseguros, S.A.; Munchener Ruckversicherungs-Gesellschaft Aktiengesellschaft in Munchen (Munich Re), and Everest Reinsurance Company, whose parent, Everest Re Group, is domiciled in Bermuda, which is on the Brazilian Tax Haven Blacklist. However, Everest Reinsurance Co. is listed as a US company and this technicality may allow Brazilian authorities to disregard the blacklisting of its parent in Bermuda.
Brad Kading, President and Executive Director, Association of Bermuda Insurers and Reinsurers, observed that the Brazilian legislation includes some unfortunate protectionist features, but “on the whole, the opening of the market is important and the legislation gives Brazilian customers an opportunity to enjoy the benefits of a competitive reinsurance market.” In time, he believes, the expanded market for reinsurance “will create an environment where protectionist measures in local laws can be removed.”