Billionaire hedge-fund moguls are getting comfortable with a US tax loophole to fatten their already plump bottom lines.
All it takes to avoid tens of millions of dollars in taxes is a short trip to Bermuda — not by them, but their cash.
Hedgies like John Paulson and Steve Cohen are forming reinsurance companies in tax-free havens like Bermuda or the Cayman Islands — and then transferring cash from their funds to the reinsurance companies.
The cash, classified as insurance company reserves, is then transferred back into the funds as reserves to be invested for future claims.
Thanks to an IRS loophole, profits from these insurance companies aren’t taxed — until the stake in the fund is sold, and that could be years down the line.
And here’s the kicker: The taxes, when paid, are at the lower capital-gains rate and not as ordinary income.
Here’s how Bermuda reinsurance cash can pay off: $100 million of regular cash invested in a fund returning 15 percent annually and taxed at the top rate will result in a $50 million profit after taxes. But the Bermuda cash will produce a profit of $77 million.
Paulson, for example, shipped $450 million last year into a Bermuda company called Pacre Ltd., which is his own “brass plate” reinsurance company, according to Bloomberg, which reported on this growing trend yesterday.
Pacre Ltd. is basically an office mail-drop without employees.
Within months, that cash was recycled out of Bermuda and back into Paulson’s hedge funds in New York, tax-free, to make him even richer without any tax bills for years into the future.
“These types of reinsurance companies are permitting US taxpayers to defer — indefinitely — US tax,” lawyer David S.Miller, a tax expert at Cadwalader Wickersham & Taft, told Bloomberg.
He branded the move as “an unjustified benefit.”
Washington has been promising for a decade to shut this loophole — but hasn’t gotten around to it.
More and more hedge-fund billionaires are relying on tax-haven reinsurance mail drops to legally avoid taxes — including Third Point’s Daniel Loeb and Greenlight Capital Inc.’s David Einhorn, it was reported.
The companies set up by Paulson, Cohen and Loeb are located within a half-mile of each other in the narrow streets ringing Bermuda’s capital, Hamilton, according to Bloomberg.
Loeb’s Third Point Reinsurance holds about $785 million in funds, including $75 million of Loeb’s own money, the report said. Cohen’s offshore reinsurer SAC Re holds about $500 million, including $125 million of Cohen’s cash, Bloomberg said.
Bermuda’s quaint, pastel buildings on a small commercial strip along Hamilton’s harbor are affixed with scores of brass plates of reinsurance companies from around the world.
Generations of investors have used reinsurance as an investment and tax-avoidance tool, but a decade ago the IRS vowed to clamp down on its abuses, with little today to show and no prosecutions.
Bloomberg said at least three new reinsurers backed by US hedge fund managers put a combined $1.7 billion back into the managers’ hands in the US.