Closure of individual Pre-existing Insurance loophole


CRS Due Diligence for Individual Pre-existing Insurance Contracts

1. Currently, the CRS exempts from its scope all pre-existing insurance contracts owned by individuals which are effectively prohibited by law to be sold to their residents

This exemption, which serves no purpose, creates a planning opportunity loophole where residents can own insurance contracts the same way that cross-border residents can access non-UCITS despite the restriction on sales to non-residents. For example:
  • Argentina legally prohibits its residents from using foreign insurers. Let's assume a Cayman Island insurer has sold a cash value insurance policy to an Argentinian resident. Then the Cayman insurer will not have to review or report on the insurance contract as it is "effectively prohibited from being sold by law" to Argentinian residents.
  • Clients could buy a local policy and then emigrate to a country where the insurer is prohibited from selling to. This would be excluded from reporting.
  • A company in the same jurisdiction as the insurer subscribes for a policy with the owner of the company residing in a jurisdiction where the insurer is prohibited from selling to. The company then dissolves and assigns the policy to the company shareholder. This policy would be excluded from due diligence.

2. How the CRS exempts pre-existing insurance which is effectively prohibited by law from being sold to reporting jurisdictions

CRS page 31 Section III: Due Diligence for Pre-existing Individual Accounts

The following procedures apply for purposes of identifying Reportable Accounts among Pre-existing Individual Accounts:

Accounts Not Required to be Reviewed, Identified, or Reported.

  1. Pre-existing Individual Account that is a Cash Value Insurance Contract or an Annuity Contract is not required to be reviewed, identified or reported, provided the Reporting Financial Institution is effectively prevented by law from selling such Contract to residents of a Reportable Jurisdiction.


"Effectively prevented by law from selling such contracts" is explained in the CRS Commentary page 110 par(2) on Section III concerning Due Diligence for Pre-existing Individual Accounts:

Paragraph A exempts from review all Pre-existing Individual Accounts that are Cash Value Insurance Contracts and Annuity Contracts, provided that the Reporting Financial Institution is effectively prevented by law from selling such contracts to residents of a Reportable Jurisdiction.

A Reporting Financial Institution is "effectively prevented by law" from selling Cash Value Insurance Contracts or Annuity Contracts to residents of a Reportable Jurisdiction if:

  1. the law of the Reporting Financial Institution’s jurisdiction prohibits or otherwise effectively prevents the sale of such contracts to residents in another jurisdiction; or
  2. the law of a Reportable Jurisdiction prohibit or otherwise effectively prevents the Reporting Financial Institution from selling such contracts to residents of such Reportable Jurisdiction.

3. The OECD will repeal the exemption of pre-existing individual Cash Value Insurance Contracts

This is an obvious simple loophole with no purpose. It was copied from the FATCA legislation in haste. The CRS as from next year, will be amended, bringing into scope insurance contracts where the insurer is effectively prohibited by law from selling such contracts to residents of a Reportable Jurisdiction.

This amendment is expected to be implemented in early 2017. Thus, in the scenario described in paragraph 1 above, the Cayman Island insurer will report on the Argentinian policyholder in September 2018.

Note: This is a similar amendment to the EU Savings Tax Directive amendment which originally excluded non-UCITS funds as they were not allowed to be sold across borders.