Washington enacts retroactive captive insurance premiums tax

May 21, 2021
May 21, 2021
0 min. read

On May 12, 2021, Washington Governor Jay Inslee signed into law a bill requiring captive insurance companies covering the in-state risks of affiliates to register with the state, and subjecting those companies to a 2% tax on Washington-sourced premiums. Although the bill took effect on signing, the tax provisions in the legislation are retroactive to 2011, with an expected revenue impact of $30 million. This level of retroactivity is extremely aggressive, and is sure to draw scrutiny.

The registration requirement is straightforward. Within 120 days after May 12, 2021, or, if later, within 120 days after first issuing a policy that covers Washington risks, an eligible captive insurer must register with the state. To be eligible, one or more of the insureds must have their principal place of business in Washington; and the insurer must have assets that exceed its liabilities by at least $1 million, have the ability to pay its debts as they come due, and be is licensed as a captive insurer by the jurisdiction in which it is domiciled. An eligible captive insurer that fails to register will be treated as an unlawful, unauthorized insurer, and will be subject to the fines and penalties generally applicable insurance companies unlawfully engaged in insurance business within the state.

The new tax is also straightforward. On or before March 1 of each year, starting on March 1, 2022, a registered captive insurer is required to pay a tax equal to 2% the net premiums for insurance directly written and provided to an affiliate for Washington risks during the preceding calendar year. For this purpose, net premiums does not include returned premiums, certain specified exempt premiums (such as reinsurance premiums), and amounts collected to cover federal and state taxes and examination fees. The term ‘Washington risks’ is defined as the share of risk covered by the premiums that is allocable to the state, based on a reasonable allocation of where the underlying risks are located or where the losses giving rise to covered claims arise. Reasonable allocation may be supported by actuarial analysis or a proxy for the insureds’ activities such as sales, property value or payroll. The term ‘affiliate’ broadly includes any entity directly or indirectly controlling, controlled by, or under common control with the captive insurance company.


Per the new law, the premiums tax is due for all insured Washington risks for any period after Jan. 1, 2011. The retroactive tax amount is due as a lump sum with the first report filed on or before March 1, 2022, and will not be subject to penalties or interest. However, even with the automatic waiver of penalties and interest, there is concern that retroactivity for a 10-year period is potentially unconstitutional. Impacted businesses could assert in litigation that imposing a brand new tax on transactions long completed with a decade of retroactivity is arbitrary, harsh and oppressive in violation of the Due Process Clause of the U.S. Constitution.

Businesses that employ captive insurance structures to cover the Washington risks of one or more affiliates with their principal place of business in the state should review the new law, determine whether additional compliance is required, and prepare for the impact on the economic benefit of their captive structure. This may be particularly burdensome for businesses that are not currently located in Washington, but were during the retroactive period.

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