I 117th CONGRESS 1st Session H. R. 5734 IN THE HOUSE OF REPRESENTATIVES October 26, 2021 Mr. Himes (for himself, Mrs. Murphy of Florida , Mr. Luetkemeyer , and Mr. LaHood ) introduced the following bill; which was referred to the Committee on Ways and Means , and in addition to the Committee on the Judiciary , for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned A BILL To amend the Internal Revenue Code of 1986 to establish a system for the taxation of catastrophic risk transfer companies to ensure sufficient capital to cover catastrophic insurance losses, and for other purposes.

1. Short title This Act may be cited as the Catastrophic Risk Transfer Act of 2021 or the CART Act . 2. Taxation of catastrophic risk transfer companies (a) In General Subchapter M of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new part: V Catastrophic risk transfer companies Sec. 860M. Catastrophic risk transfer companies. Sec. 860N. Taxation of catastrophic risk transfer companies. Sec. 860O. Taxation of security holders of catastrophic risk transfer company; limitations applicable to dividends received from catastrophic risk transfer company. Sec. 860P. Dividends paid by catastrophic risk transfer company after close of taxable year. 860M. Catastrophic risk transfer companies (a) General rule For purposes of this subtitle, the term catastrophic risk transfer company means any domestic corporation which— (1) is— (A) created or organized under the laws of a State which has enacted a State law which enables the organization and licensure of a special purpose insurer (whether or not designated as such under such State law) which is capable of carrying out the activities described in paragraph (2), and (B) regulated and licensed as such a special purpose insurer by the State commissioner of insurance or other State official charged with regulation of insurance within the State, (2) the principal purpose of which is the carrying out of the activities of catastrophic risk transfer, but only if— (A) substantially all of such activities relate to business other than general annuity business, and (B) such activities are limited to— (i) issuing equity and debt securities, (ii) owning qualified investments, and (iii) entering into one or more insurance or reinsurance agreements covering catastrophic risks from persons who are not related to such corporation at any time during the period beginning with the date such agreements are entered into and ending with the last day of the period such agreements are in effect, and (3) is authorized by the State commissioner of insurance or other State official charged with regulation of insurance within the State to carry out the activities of catastrophic risk transfer. (b) Limitations A corporation shall not be considered a catastrophic risk transfer company for any taxable year unless— (1) it files with its return for the taxable year an election to be a catastrophic risk transfer company or has made such election for a previous taxable year, (2) at least 90 percent of its gross income is derived from— (A) investment income from qualified investments, and (B) (i) reinsurance premiums received from a regulated insurance company, or (ii) insurance premiums from— (I) a governmental agency, (II) a company the assets of which exceed $100,000,000, or (III) a company that is transferring a sufficiently large pool of a single type of underlying risk that the insurance of such pool of risk would on a stand-alone basis constitute operation of an insurance business under part II of subchapter L, and (3) the limit of the insurance or reinsurance being provided is fully collateralized. (c) Special rule for series issuances If a catastrophic risk transfer company (within the meaning of subsection (a)), or a protected cell of such company, issues a series or class of securities which primarily has recourse to, or is primarily linked to, a designated reinsurance agreement and pool of collateral or assets, such series or class shall be treated as a separate corporation for purposes of this title (other than determining whether the requirements of subsection (a) are met). (d) Failure To satisfy gross income test (1) Disclosure requirement A catastrophic risk transfer company which fails to meet the requirement of paragraph (2) of subsection (b) for any taxable year shall nevertheless be considered to have satisfied the requirement of such paragraph for such taxable year if— (A) following the catastrophic risk transfer company identification of the failure to meet such requirement for such taxable year, a description of each item of its gross income described in such paragraph is set forth in a schedule for such taxable year filed in the manner provided by the Secretary, and (B) the failure to meet such requirement is due to reasonable cause and not due to willful neglect. (2) Imposition of tax on failures If paragraph (1) applies to catastrophic risk transfer company for any taxable year, there is hereby imposed on such company a tax in an amount equal to the excess of— (A) the gross income of such company which is not derived from sources referred to in subsection (b)(2), over (B) one-ninth of the gross income of such company which is derived from such sources. (e) Definitions For purposes of this part— (1) Catastrophic risk (A) In general The term catastrophic risk means a risk of loss which has a low likelihood of occurring but which will be large in amount. (B) Special rules For purposes of subparagraph (A)— (i) in the case of direct insurance, a risk of loss shall not be treated as large in amount unless such loss would exceed $25,000,000 if it occurs, and (ii) in the case of mortality risk, the risk of loss transferred may be taken into account under subparagraph (A) only if it involves a pool of mortality or longevity risks. (2) Investments and income (A) Qualified investment The term qualified investment means— (i) cash, (ii) interests in money market funds, and (iii) investment-grade debt securities and funds primarily holding such debt securities. (B) Investment income The term investment income means interest that is accrued or received on, distributions in connection with, or proceeds from the disposition of, qualified investments. (3) Regulated insurance company The term regulated insurance company means any company which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance (within the meaning of section 514(b)(2) of the Employee Retirement Income Security Act of 1974, as in effect on the date of the enactment of this section). (4) Related person A person shall be treated as related person to another person if such person bears a relationship to such other person described in section 267(b) or 707(b). 860N. Taxation of catastrophic risk transfer companies (a) Requirements applicable to catastrophic risk transfer companies The provisions of this part (other than subsection (c) of this section) shall not be applicable to a catastrophic risk transfer company for a taxable year unless— (1) the deduction for dividends paid during the taxable year (as defined in section 561) equals or exceeds 90 percent of its catastrophic risk transfer company taxable income for the taxable year determined without regard to subsection (b)(2)(C), and (2) as of the close of the taxable year, the catastrophic risk transfer company has no earnings and profits accumulated in any taxable year to which the provisions of this part (or the corresponding provisions of prior law) did not apply to it. (b) Method of taxation of companies (1) Imposition of tax on catastrophic risk transfer companies There is hereby imposed for each taxable year upon the catastrophic risk transfer company taxable income of every catastrophic risk transfer company a tax computed as provided in section 11, as though the catastrophic risk transfer company taxable income were the taxable income referred to in section 11. (2) Catastrophic risk transfer company taxable income The catastrophic risk transfer company taxable income shall be the taxable income of the catastrophic risk transfer company adjusted as follows: (A) The net operating loss deduction provided in section 172 shall not be allowed. (B) The deductions for corporations provided in part VIII (except section 248) in subchapter B (section 241 and following, relating to the deduction for dividends received, etc.) shall not be allowed. (C) The deduction for dividends paid (as defined in section 561) shall be allowed. (D) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on change of annual accounting period). (E) The taxable income shall be computed without regard to section 454(b) (relating to short-term obligations issued on a discount basis) if the company so elects in a manner prescribed by the Secretary. (F) There shall be deducted an amount equal to the tax imposed by subsection (d)(2) of section 860M for the taxable year. (G) There will be allowed as a deduction loss adjustment expenses and expenses of— (i) modeling firms, claims reviewers, loss reserve specialists, attorneys, accountants, actuaries, indenture trustees (including reinsurance trustees and paying agents), independent directors, administrators of the catastrophic risk transfer company, rating agencies of any securities issued by the catastrophic risk transfer company, reset and calculation agents, reporting agencies, data providers, model escrow agents, securities listings, and securities listing agents, and (ii) other professionals or service providers, or other out-of-pocket costs incurred with issuing securities, reasonably related thereto. (3) Section 311(b) not to apply to certain distributions Section 311(b) shall not apply to any distribution by a catastrophic risk transfer company to which this part applies, if such distribution is in redemption of its stock or securities upon the demand of the holder. (4) Time certain dividends taken into account For purposes of this title, any dividend declared by a catastrophic risk transfer company during any calendar year and payable to security holders of record on a specified date in such a year shall be deemed— (A) to have been received by each security holder on December 31 of such calendar year, and (B) to have been paid by such company on December 31 of such calendar year (or, if earlier, as provided in section 860P). The preceding sentence shall apply only if such dividend is actually paid by the company prior to the 15th day of the 9th month of the following calendar year. (c) Earnings and profits (1) Distributions to meet requirements of subsection (a)(2) Any distribution which is made in order to comply with the requirements of subsection (a)(2)— (A) shall be treated for purposes of this subsection and subsection (a)(2) as made from earnings and profits which, but for the distribution, would result in a failure to meet such requirements (and allocated to such earnings on a first-in, first-out basis), and (B) to the extent treated under subparagraph (A) as made from accumulated earnings and profits, shall not be treated as a distribution for purposes of subsection (b)(2)(C) and section 860P. (2) Catastrophic risk transfer company For purposes of this subsection, the term catastrophic risk transfer company includes a domestic corporation which is a catastrophic risk transfer company determined without regard to the requirements of subsection (a). (d) Procedures similar to deficiency dividend procedures made applicable (1) In general If— (A) there is a determination that the provisions of this part do not apply to a catastrophic risk transfer company for any taxable year (hereafter in this subsection referred to as the non-CART year ), and (B) such catastrophic risk transfer company meets the distribution requirements of paragraph (2) with respect to the non-CART year, then, for purposes of applying subsection (a)(2) to subsequent taxable years, the provisions of this part shall be treated as applying to such catastrophic risk transfer company for the non-CART year. If the determination under subparagraph (A) is solely as a result of the failure to meet the requirements of subsection (a)(2), the preceding sentence shall also apply for purposes of applying subsection (a)(2) to the non-CART year and the amount referred to in paragraph (2)(A)(i) shall be the portion of the accumulated earnings and profits which resulted in such failure. (2) Distribution requirements (A) In general The distribution requirements of this paragraph are met with respect to any non-CART year if, within the 90-day period beginning on the date of the determination (or within such longer period as the Secretary may permit), the catastrophic risk transfer company makes 1 or more qualified designated distributions and the amount of such distributions is not less than the excess of— (i) the portion of the accumulated earnings and profits of the catastrophic risk transfer company (as of the date of the determination) which are attributable to the non-CART year, over (ii) any interest payable under paragraph (3). (B) Qualified designated distribution For purposes of this paragraph, the term qualified designated distribution means any distribution made by the catastrophic risk transfer company if— (i) section 301 applies to such distribution, and (ii) such distribution is designated (at such time and in such manner as the Secretary shall by regulations prescribe) as being taken into account under this paragraph with respect to the non-CART year. (C) Effect on dividends paid deduction Any qualified designated distribution shall not be included in the amount of dividends paid for purposes of computing the dividends paid deduction for any taxable year. (3) Interest charge (A) In general If paragraph (1) applies to any non-CART year of a catastrophic risk transfer company, such catastrophic risk transfer company shall pay interest at the underpayment rate established under section 6621— (i) on an amount equal to 50 percent of the amount referred to in paragraph (2)(A)(i), and (ii) for the period— (I) which begins on the last day prescribed for payment of the tax imposed for the non-CART year (determined without regard to extensions), and (II) which ends on the date the determination is made. (B) Coordination with subtitle F Any interest payable under subparagraph (A) may be assessed and collected at any time during the period during which any tax imposed for the taxable year in which the determination is made may be assessed and collected. (4) Provisions not to apply in the case of fraud The provisions of this subsection shall not apply if the determination contains a finding that the failure to meet any requirement of this part was due to fraud with intent to evade tax. (5) Determination For purposes of this subsection, the term determination has the meaning given to such term by section 860(e). Such term also includes a determination by the catastrophic risk transfer company filed with the Secretary that the provisions of this part do not apply to the catastrophic risk transfer company for a taxable year. (e) Definitions For purposes of this part— (1) the terms dividend and distribution shall include payments made to holders of debt securities, and (2) the term security holder shall include holders of equity and debts securities issued by a catastrophic risk transfer company. 860O. Taxation of security holders of catastrophic risk transfer company; limitations applicable to dividends received from catastrophic risk transfer company (a) Character of dividends Each catastrophic risk transfer company shall identify in a statement issued to each security holder the portion of its dividends paid with respect to the year, under the rules of section 860N, which are attributable to the following types of income of the catastrophic risk transfer company: (1) Interest. (2) Tax-exempt interest. (3) Qualified dividend income, within the meaning of subparagraph (B) of section 1(h)(11) of this title. (4) Dividends other than qualified dividend income. (5) Capital gains. (6) Insurance or reinsurance premiums. (b) Look through for taxation of dividends (1) General Except as provided in subsection (n) of section 871 or subsection (f) of section 881 of this title, each security holder shall be subject to taxation under this title on the dividends received from a catastrophic risk transfer company in the same manner as if such security holder had received the portions of each dividend identified on the statement provided under subsection (a) directly. (2) Dividend income In computing any deduction under section 243 with respect to the portion of a dividend identified on the statement under subsection (a) as dividend income referenced in paragraphs (3) or (4) of such subsection, such portion shall be treated as received from a corporation which is not a 20-percent owned corporation. (3) Capital gain income The portion of a dividend identified on the statement under subsection (a) as capital gain income referenced in paragraph (5) of such subsection shall be treated by the security holders as a gain from the sale or exchange of a capital asset held for more than 1 year. 860P. Dividends paid by catastrophic risk transfer company after close of taxable year (a) General rule For purposes of this chapter, if a catastrophic risk transfer company— (1) declares a dividend on or before the later of— (A) the 15th day of the 9th month following the close of the taxable year, or (B) in the case of an extension of time for filing the company's return for the taxable year, the due date for filing such return taking into account such extension, and (2) distributes the amount of such dividend to security holders in the 12-month period following the close of such taxable year and not later than the date of the first dividend payment of the same type of dividend made after such declaration, the amount so declared and distributed shall, except as provided in subsection (b) and to the extent the company elects in such return in accordance with regulations prescribed by the Secretary, be considered as having been paid during such taxable year. (b) Receipt by security holder Amounts to which subsection (a) applies shall be treated as received by the security holder in the taxable year in which the distribution is made. . (b) Exemption from withholding taxes on nonresident aliens and foreign corporations (1) Nonresident aliens Section 871 of the Internal Revenue Code of 1986 is amended by redesignating subsection (n) as subsection (o) and by inserting after subsection (m) the following: (n) Exemption for qualified investment income dividends of catastrophic risk transfer companies (1) In general Except as provided in paragraph (2), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any qualified investment income dividend received from a catastrophic risk transfer company which meets the requirements of section 860M(a) for the taxable year with respect to which the dividend is paid. (2) Exceptions Paragraph (1) shall not apply— (A) to any qualified investment income dividend received from a catastrophic risk transfer company by a person to the extent such dividend is attributable to investment income received by such company on indebtedness issued by such person or by any corporation or partnership with respect to which such person is a 10-percent shareholder, (B) to any qualified investment income dividend with respect to stock of a catastrophic risk transfer company unless the person who would otherwise be required to deduct and withhold tax from such dividend under chapter 3 receives a statement (which meets requirements similar to the requirements of subsection (h)(5)) that the beneficial owner of such stock is not a United States person, and (C) to any qualified investment income dividend paid to any person within a foreign country (or any such dividend payment addressed to, or for the account of, persons within such foreign country) during any period described in subsection (h)(6) with respect to such country. Subparagraph (C) shall not apply to any dividend with respect to any stock which was acquired on or before the date of the publication of the Secretary's determination under subsection (h)(6). (3) Qualified investment income dividend For purposes of this paragraph, the term qualified investment income dividend means the portion of any dividend distributed by a catastrophic risk transfer company— (A) which is attributable to investment income from qualified investments earned during a taxable year in which the catastrophic risk transfer company meets the requirements of subsection (b) of section 860M and subsection (a) of section 860N, and (B) which is reported by the company as a qualified investment income dividend in written statements furnished to its security holders. . (2) Foreign corporations Section 881 of such Code is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following: (f) Exemption for qualified investment income dividends of catastrophic risk transfer companies (1) In general Except as provided in paragraph (2), no tax shall be imposed under paragraph (1)(A) of subsection (a) on any qualified investment income dividend received from a catastrophic risk transfer company which meets the requirements of section 860M(a) for the taxable year with respect to which the dividend is paid. (2) Exceptions Paragraph (1) shall not apply any dividend described in section 871(n)(2). (3) Qualified investment income dividend For purposes of this paragraph, the term qualified investment income dividend has the same meaning given such term by section 871(n)(3). . (c) Conforming amendment The table of parts for subchapter M of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new item: Part V-Catastrophic risk transfer companies. . 3. State taxation of reinsurance premiums of catastrophic risk transfer companies (a) Prevention of double taxation A taxing jurisdiction other than the State under the laws of which a catastrophic risk transfer company is created or organized shall not impose a premium tax on any premiums paid to, or received by, such company on a policy of reinsurance. (b) Coordination of rate of premium tax with tax on foreign reinsurers If a State allowed under subsection (a) imposes a premium tax on a catastrophic risk transfer company on premiums on a policy of reinsurance, the amount of such tax shall not exceed the tax which would have been imposed under section 4371 of the Internal Revenue Code of 1986 if such premiums were paid to a foreign insurer or reinsurer. (c) Definitions For purposes of this section— (1) Catastrophic risk transfer company The term catastrophic risk transfer company has the meaning given such term by section 860M of the Internal Revenue Code of 1986. (2) Policy of reinsurance The term policy of reinsurance has the meaning given such term by section 4372(f) of such Code. (3) Taxing jurisdiction The term taxing jurisdiction means any of the several States, the District of Columbia, or any territory or possession of the United States, any municipality, city, county, or any other political subdivision within the territorial limits of the United States with the authority to impose a premium tax on a policy of reinsurance.