The Bermuda 'Reacharound' Triangle Tax Dodge

Tyler Durden's picture

With sequesters and loopholes the only two words that seem to matter in Washington (the latter more than the former as far as action), we suspect the popularity of the so-called 'Bermuda Triangle' tax dodge may raise more than a few eyebrows. Put simply, hedge fund managers create a Bermuda-based re-insurance entity, their clients (high-net-worth individuals) funnel their hard-earned gains through this offshore entity and back to the US hedge funds - dramatically reducing their personal income taxes. The re-insurers do a minimum of business to create the appearance of legitimacy but are enabling hedge fund investors to avoid paying high-rate income tax on any gains from the funds and growing tax-free while in the fund. Of course this is defended as "good tax management." Funds such as Paulson's, Third Point, Greenlight, and SAC all use this vehicle according to Bloomberg as a handy way to funnel a US hedge fund investment through a tax haven. It truly is good to be king...


Via Bloomberg,

By recycling the funds through Bermuda-based Pacre Ltd., the Paulson executives are positioned to legally exploit a little-known tax loophole, reduce their personal income taxes and delay paying the bill for years.


These types of reinsurance companies are permitting U.S. taxpayers to defer -- indefinitely -- U.S. tax,” said David S. Miller, a tax lawyer at Cadwalader Wickersham & Taft LLP. For some, he said, it’s “an unjustified benefit.”


A decade after the U.S. Internal Revenue Service threatened to crack down on what it said were abuses by hedge-fund backed reinsurers, more high-profile money managers are setting up shop in tax havens. Paulson, SAC Capital Advisors LP’s Steven A. Cohen and Third Point LLC’s Daniel Loeb have started Bermuda reinsurance companies since 2011, following a similar Cayman Islands venture by Greenlight Capital Inc.’s David Einhorn.


Because reinsurers, which sell coverage to other insurers, manage large pools of capital, they’re a handy way to funnel a U.S. hedge fund investment through a tax haven.




At a time when the Obama administration and Congressional leaders of both parties are calling for a corporate tax overhaul that includes eliminating some loopholes, the reinsurance tax dodge is gaining popularity among hedge funds.




By setting up reinsurance companies there, money managers can take advantage of a loophole in IRS rules. Ordinarily, when hedge fund managers invest in their funds, they pay either the 39.6 percent rate for ordinary income or the 20 percent long- term capital gains rate, depending on how frequently securities are traded, plus an extra 3.8 percent health-law surcharge. If they were to move the hedge funds to tax havens, they would incur IRS penalties on earnings from what the agency calls “passive foreign investment companies.”


Here’s the catch: The IRS doesn’t penalize earnings from insurance companies, which it considers to be “active” businesses. As a result, by routing money through a Bermuda reinsurer, which in turn puts its assets back into their own hedge funds, fund managers can defer any taxes until selling the stake. They then pay only the lower capital gains tax rate.


In the meantime, the money grows tax-free, and the savings add up. Investing $100 million in a hedge fund that returns 15 percent annually, and paying the top marginal ordinary income rate on profit, results in a $50 million profit after taxes after five years. If the investment is taxed like a Bermuda reinsurer, the gain is $77 million.




The IRS said some of the offshore arrangements were shams, either because they weren’t selling enough insurance or because the insurance they reported selling was phony. The IRS “will challenge the claimed tax treatment,” government lawyers wrote.


The IRS has rarely if ever done so. Tax lawyers and insurance executives said they were unaware of any company targeted by the IRS, even in private.


“Nobody’s been challenged, so nobody knows whether it’s ironclad or not,” said Faries, the Bermuda lawyer. The IRS declined to comment.




Those involved in establishing reinsurers defend the strategy. “Given the world we’re in, it’s just good tax management,”

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localsavage's picture

Money doesn't grow on trees

Tijuana Donkey Show's picture

It is printed on trees. Dead trees for dead presidents. 

knukles's picture

And for Jack Lew, who it was reported had a buncha his money in hedge fund investments, for which he had business oversight at Citi.  Meaning he may have not made the investments but sure a shell knew about the structures, else he was remiss in his responsibilities. 
So there you have it. 
He probably knew about this shit and probably participated in such...

Bbut then again, there are rule and there are rules, peasants.

NotApplicable's picture

Gee, if only there wasn't this crime in progress doing business as the IRS, well then, connected people couldn't escape the screwing over the rest of us get.

Not to mention that income is the LAST thing any rational person would want to tax, as it devalues labor. Oh wait, our economy doesn't require labor anymore...

Carry on!

Say What Again's picture

Is it possible that the VIX will go below 12 today?

Also -- How about that action in TLT?

My only comment -- WTF


EOD Update: VIX hit 12.08 for a moment going into the close!!!   I guess there is nothing to worry about!

PAWNMAN's picture

We've been in LALA land for so long now who even gives a rats ass?

espirit's picture

The MIC gives a rat's ass, otherwise emphasis on cybersecurity for those 0's and 1's would be a moot point.  The 1 percenters are getting a little antsy that their global wealth could be hacked by a twentysomething ChiCom working in the enterprize system.

The winner will be him with greatest patience, or the psycho with the finger on the nuclear trigger.

long-shorty's picture

This "insurance" scam to avoid taxes is available to nearly every American in the form of a "variable annuity." 

TruthInSunshine's picture

That 15% annual income for each of 10 years that was used as a hypothetical is merely a 20% higher annual return than what Bernie Madoff's "fund" was reputedly paying its partners, and statistically speaking, a 12% return, consistently, for anything close to 10 consecutive years, is as likely as the Bernanke refusing to purchase more treasury notes.

I realize the figure used was to illustrate an arithmetical point, and hypothetical, but sheesh.

There was an extremely well-researched study using extensive citation to credible sources that successfully debunked the bulk of Jeremy Siegel's calculus on long-term equity market historical rates of returns, finding ACTUAL REAL EQUITY MARKET RETURNS to be 2.4% (IIRC), and actually underperforming real rates of returns on bonds (it's counter-intuitive, since investing in bonds implies less risk).

The kicker is that ACTUAL EQUITY MARKET RETURNS assumes one purchased shares in every single publicly traded company, which isn't done by any single investor, which is where AVERAGE EQUITY MARKET RETURNS comes into play as the far more accurate metric, and that one was genuinely dreadful, failing to keep pace with inflation for stretches as long as 30 years at a time, and also resulting in losses as high as 50% over periods as long as 7 years (think of the period preceding the bust and that preceding the 2008 financial crisis, not to mention the 1927 to 1937 period).

Then there's that whole "survivorship bias" bitch that bites quite hard, but which the constant re-shuffling of indexes (take one failed ticker down, replace it all around...that's what it's all about) allows to be massively understated in terms of impact on "historical returns."

And that's the tip of the iceberg in terms of how the financial industry and Wall Street sell a load of shit about "stocks for the long run" via statistical manipulation, which is actually encouraged by your elected government.

There's no truth in advertising whatsoever when it comes to the Great Equity Market Ponzi, where Wall Street is a cabal with a license to steal and sell its "services" via fraudulent marketing, and this is why "long term investors" in equity markets via "pension" and "401(k) funds" now find themselves 30% to 50% underwater in real terms EVEN ASSUMING THEY STAYED IN THE MARKET IN THE SAME DOLLAR COST AVERAGING MANNER DURING THE BEAR MARKET RALLY SINCE MARCH OF 2009 - not only have they lost their asses, but they've endured many sleepless nights and ulceration of their G.I. tract.

I will find that study and link it:  It was a thorough dismantling of Jeremy Siegel's claims, from A through Z.


Pat Hand's picture

I keep selling ATM Spy puts every Friday
Up 22% since June
Risking a one week move
It's insane but can't fight the tape

Kitler's picture

Is that the same Jack (Jacob) Lew from Citi that made a killing shorting the subprime garbage that passage of his FSMA under Clinton helped create?

Now if he did it in an offshore Bermuda tax haven through one of these tax reducing reinsurance/hedge fund scams then he is one SMART guy!

And no doubt will serve all Americans well in the capacity of Treasury Secretary.

Until it all ends badly.

Ignatius's picture

I was listening - as long as I could stand - to Obummer on Bloomberg radio this AM when goin' out for smokes.

"Well we gotta give a little, and the Republicans gotta give a little, blah, blah, blah."

If I'd had a gun I might have shot myself.  Honest to God, I can not listen to this criminal class anymore.

"Triangle tax dodge?" Hell, why not.  What else you got to show me?

These cunts have no place in my life lest they wander into my yard (not recommended - the dog, ya know).


Tijuana Donkey Show's picture

California runs all it's budget through Bermuda, right? Cali needs any help it can in classifing "capital."  

Dugald's picture


And you can bet all those nice people at the top are using this loophole so it won't be closed anytime soon.

Am I being synical.......Nah! me, never!

Say What Again's picture

Just once I would like to see a reporter or two start asking Oblahma questions about this shit at a press briefing, instead of the pansy-ass questions he usually gets.

If there is to be any hope of the sheeple finally coming to their senses, the media needs to put this on the front page.  MSN needs to have this kind of info on their cute little banner at the top of the main web page instead of the "fun" little spots on who is wearing what fashion, what the dolphins are doing, etc.

I know -- I'm dreaming.

Joe Davola's picture

Don't taze me mr president bro, but could you comment on...

Say What Again's picture

Maybe if we speak to him in the new dialect -- "Obonics."

Urban Redneck's picture

The envious ass-hats of the free shit army are too invested in their fantasies of leprechauns and pots of gold worth trillions hidden away in exotic locales- ignorant of the fact that the reach around recycles the digital fiat into the great domestic ponzi scheme in mere milliseconds, which is why ignorant greed will always fail to displace entrenched greed- their lobbyists will draft 1000 pages new tax code riddled with more loopholes than over-aged Emmentaler and their pet congress-critters will fuck over the domestic sheeple like an Australian who doesn't think his job is done even after he has finished fleecing (shearing) the sheep...  

Say What Again's picture

Our legislators must be using these loopholes as well.  Otherwise, they would have changed the law.  It really is that simple.

Say What Again's picture

Even if they don't use the loophole directly, you know their financial supporters do.

Yen Cross's picture

 This loophole bullshit, is a joke! I pay taxes up the ass. Yes I have Corps. and Trusts. but I still pay up the ass!  We have a liberal dikwad spendor in Thief, running the White House! That piece of shit couldn't clip a coupon on his way to fire up a smoke and crack the seal on his 40oz Mickey's Big Mouth!

Tijuana Donkey Show's picture

What about unemployment insurance? Can I run mine through Bermuda?

Cognitive Dissonance's picture

"Do as we say, not as we do." - The King and I.....and his court.

vato poco's picture

(shrugs) We live in a fucking banana republic. What the hell did y'all expect?

dick cheneys ghost's picture

Im sure Jack Lew will get to the bottom of this................(ya right)

Super Broccoli's picture

what about freedom ? what about less state that would then require way less money to be taken from the ones that made it ?


Stuck on Zero's picture

Time to engineer a "coup" in Bermusa.


JustObserving's picture

If you ain't corrupt in USA, you ain't making no money.  Now, keep shorting gold and silver.  Blythe and Bernanke have your back.

Yen Cross's picture

  Good visual Tyler. Welcome to the global [Toilet Bowl]...

chunga's picture

We just did our taxes and they're more than last year.

All I have to say to these loophole, tax-haven pricks is: FUCK YOU!

nofluer's picture

I once had a tax client who was whining about how much tax he still had to pay (a lot lower percentage than *I* paid!!!) He asked me if there wasn't some way that he could get out of paying taxes at all and I told him, "Sure. that's easy. Just quit making money."

Rainman's picture

Wrong answer....the only way out is to die. Even panhandlers pay taxes every time they buy a bottle of Night Train.

nmewn's picture

Or if the name known as the one being taxed...dies or goes missing.

Always better to have multiple ID's...fawtunately, ah keep mah feathers numbered fah jest sech an emugency! ;-)

Tijuana Donkey Show's picture

At that point, there is no ID, just a bloated liver.

rsnoble's picture

What would happen if a huge earthquake sank Bermuda?  They couldn't really work around that because there would be no such place.  Truthfully the big shots probably don't go to that trouble anyway they just say they do and the regulators let them get away with it.

That's the problem now, everyone know how crooked these bastards are no matter what kind of crazy conspiracy pops up their trustworthyness is so nonexistent it can be believable.


MrBoompi's picture

“Given the world we’re in, it’s just good tax management,”

Yeah no shit.  Anyone would be pretty stupid for not stealing when there's no penalty for it.

marathonman's picture

So what?  Abolish the damn income tax altogether.

Sach Mahoney's picture

If the fuck'n taxes weren't so rediculously high, then maybe people wouldn't look to do things liket this.  High taxes push everything under ground.  

Dugald's picture

Even if taxation rates were lower there would still be people and companies who would rort the system because they can....You can't change human nature.

Goggles Pisano's picture

The "Reacharound", good times, good times........Usually you pay double for that kind of action, Cotton.

Yen Cross's picture

 I'm watching "faux paux", news right now. Michelle Malkin is a hottie! She called otool "Chicken Little in thief" I like that girl!


  Fuck off libtards!

Bicycle Repairman's picture


Did any of you actually read the article?  This is a fantastic tax loophole used by executives and high paid professionals for decades.  The government could shut it down with the stroke of a pen.

The Caribbean is filled with tax-deferred American (and British) loot.

Instead they'll increase your taxes and loot your retirement.

Everyone OK with that?


Dugald's picture

"Instead they'll increase your taxes and loot your retirement.

Everyone OK with that?"

Why not, its the reason they allow you to exist, pay  up and look cheeful.