The CART Act of 2025 (Catastrophic Risk Transfer Act) would create a new category of U.S. domestic corporations called Catastrophic Risk Transfer Companies (CRTCs), designated as special purpose insurers regulated by state insurance regulators. CRTCs would operate largely as investment/instalment vehicles that also assume and reinsure large, highly unlikely losses (catastrophic risks). The bill sets up a distinct federal tax regime for CRTCs and their security holders, designed to ensure CRTCs hold sufficient capital to cover catastrophic losses and to regulate how income, dividends, and reinsurance premiums are taxed. Key features include an election to be treated as a CRT C corporation, a strict 90% income-source test, a requirement that insurance/reinsurance activities be fully collateralized, a special calculation of “CRTC taxable income” with numerous adjustments, and a look-through tax framework for investors holding CRT securities. It also coordinates state-level taxation on reinsurance premiums to avoid double taxation and defines what counts as a “catastrophic risk.” In practice, the bill creates a parallel, heavily regulated tax regime to encourage capital-intensive, securitized catastrophe risk transfer activities, while giving the federal government tools to tax, regulate, and monitor these entities and their investors. The approach emphasizes capital adequacy, investor transparency, and cross-border tax considerations for foreign holders.
Key Points
- 1Creation and regulation of Catastrophic Risk Transfer Companies (CRTCs): Domestic corporations organized as special purpose insurers, licensed and regulated by a State insurance regulator, focused on catastrophic risk transfer activities such as issuing securities, owning qualified investments, and entering into reinsurance agreements with non-related parties. A special rule makes certain issuances (like series or classes) treated as separate corporations for tax purposes.
- 290% gross income test and collateralization: To be treated as a CRT CTC, a company must elect (or have an existing election) and must have at least 90% of its gross income from either investment income on qualified investments or from reinsurance premiums from regulated insurers (or specified large/ government-related counterparties). The overall insurance/reinsurance provided must be fully collateralized.
- 3New tax regime for CRTCs (Sec. 860N): CRTCs are taxed under a separate framework that modifies how income is computed (no net operating loss deduction, no dividends-received deduction, but a deduction for dividends paid). It also allows a deduction for a tax equal to the CR TC tax imposed under 860M(d)(2), and provides for special expense deductions related to modeling, claims review, actuarial work, and other professional services tied to issuing securities. There is a mechanism for handling noncompliant years (non-CART years) where the company can be taxed as a CRTC under certain conditions, plus an interest charge for any underpayment in those cases.
- 4Governance for noncompliance and penalties (non-CART year rules): If a CRT CTC fails the gross income test but later meets it, the tax system can retroactively apply to the non-CART year under a defined process. There are requirements for qualified designated distributions to cure accumulated earnings and profits in those years, and an interest charge may apply.
- 5Taxation of security holders (Sec. 860O): Dividends paid by CRTCs are passed through to security holders with a “look-through” rule. Investors are taxed as if they directly received the specific components of the dividend (e.g., interest, qualified investment income dividends, capital gains, etc.). The bill creates a special treatment for qualified investment income dividends to ease withholding for nonresident aliens and foreign corporations, subject to certain exceptions.
- 6State taxation and coordination on reinsurance premiums (Sec. 3): To avoid double taxation, states (and other jurisdictions) are limited in taxing reinsurance premiums paid to CRTCs. If states tax such premiums, the rate cannot exceed what would be imposed on foreign reinsurers under existing law, with definitions clarifying what constitutes a reinsurance policy and the relevant taxing jurisdiction.
- 7Definitions and terminology: The bill defines catastrophic risk broadly (low-likelihood but potentially large losses) with a $25 million threshold for direct insurance losses, and it includes mortality/longevity risk under a pool-based framework. It also defines “qualified investments,” “regulated insurance company,” and “related person” to determine eligibility and related-party constraints.