The CART Act of 2025 aims to establish a framework for the taxation of companies specializing in the transfer of catastrophic risks, ensuring fair and consistent tax treatment at both the federal and state levels.
Darin LaHood
Representative
IL-16
The CART Act of 2025 introduces tax regulations for "catastrophic risk transfer companies," which are specialized insurers focusing on high-impact, low-probability events. It defines specific criteria for these companies, including income sources and collateralization requirements, and outlines how they and their security holders will be taxed, including adjustments to taxable income and dividend treatment. The Act also addresses state taxation of reinsurance premiums to prevent double taxation, ensuring that only the company's state of origin can impose such taxes, capped at the federal rate for foreign insurers.
CART Act of 2025: New Tax Rules for Catastrophic Risk Companies Explained
The Catastrophic Risk Transfer (CART) Act of 2025 creates a whole new way to tax companies that deal with, well, catastrophic risks. Think earthquakes, massive hurricanes, and other low-probability, high-cost disasters. The bill sets up a special category called "catastrophic risk transfer companies" and lays down the rules for how they (and the people invested in them) get taxed.
Decoding the Risk
So, what exactly is a "catastrophic risk transfer company"? According to the CART Act, it's a US-based company that's specifically set up and licensed to deal with transferring catastrophic risks. These companies have to be authorized by state insurance regulators and, this is key, at least 90% of their income needs to come from investments and premiums related to insuring these huge risks. We're talking about (re)insurance for regulated insurance companies, government agencies, or big corporations with assets over $100,000,000 (Section 2). They also have to fully back up the (re)insurance they provide.
For direct insurance, a loss has to be expected to top $25,000,000 to even qualify as "catastrophic" (Section 2). Imagine a coastal business insuring against a once-in-a-century hurricane – that’s the kind of risk we’re talking about.
Tax Time: The Nitty-Gritty
These specialized companies get taxed on their "catastrophic risk transfer company taxable income," which is basically their regular corporate income with a few tweaks. They get deductions for dividends they pay out and certain expenses (Section 2). The idea is to streamline the tax process for companies focused on this very specific type of risk.
For the folks holding securities in these companies (think stocks or bonds), the tax situation gets interesting. The company has to tell security holders what kind of income their dividends represent – regular interest, tax-exempt interest, capital gains, etc. Then, the security holders get taxed as if they earned that income directly (Section 2). It's a pass-through system.
The bill also throws a bone to foreign investors. Dividends from "qualified investment income" of these companies are generally exempt from withholding taxes for nonresident aliens and foreign corporations (Section 2).
State Lines
To avoid double-dipping, the CART Act makes sure only the state where a catastrophic risk transfer company is based can tax the reinsurance premiums it receives or pays out (Section 3). And, if a state does tax those premiums, the rate can't be higher than what a foreign insurer would pay under federal law. This keeps things consistent across state lines.
The Big Picture
This is all about setting clear, consistent tax rules for a niche part of the insurance industry. It's designed to make it easier for companies to specialize in transferring the risk of enormous, but unlikely, events. While there are potential challenges like manipulating the definition of catastophic risk, the CART Act aims to put a framework in place that supports this market and avoid double taxation. It will be interesting to see how it shapes the insurance landscape in the coming years.