The Catastrophic Risk Transfer (CART) Act of 2025 adds a new Part V to subchapter M of the Internal Revenue Code to define and tax ‘‘catastrophic risk transfer companies’’ — state‑licensed special‑purpose insurers created to absorb low‑probability, high‑severity losses. The bill sets eligibility rules, special taxable‑income rules, distribution requirements, and reporting obligations for those entities, and it adjusts federal withholding rules and state premium‑tax authority for reinsurance received by them.
For insurers, capital markets participants, tax advisers and state regulators, CART creates a formal federal tax wrapper intended to make securitized catastrophe capacity more predictable for investors while channeling large, collateralized reinsurance transactions into new entities subject to specific tax and disclosure rules. That changes deal economics, reporting duties, and state revenue exposure in ways that will matter to structurers, compliance shops, and tax counsel working on catastrophe financing.
At a Glance
What It Does
The bill creates a new federal tax category for state‑authorized special‑purpose insurers that transfer catastrophic risk, requires these companies to meet eligibility and collateralization conditions, and prescribes a modified corporate tax computation tied to dividend distributions to security holders. It also creates look‑through taxation rules for dividend components and narrows withholding on a subset of dividends paid to nonresident investors.
Who It Affects
Special‑purpose insurers (SPIs) and protected cells domiciled and licensed under state SPi statutes, cedents and buyers of catastrophic reinsurance, capital‑market investors holding debt or equity issued by those SPIs, and state insurance and tax authorities that collect premium taxes. Service providers who support securities issuances will see new deductible and reporting categories.
Why It Matters
CART formalizes the tax treatment of securitized catastrophe capacity — potentially unlocking more private capital for rare, large losses — while shifting tax and compliance burdens onto the new SPVs and their investors. The package also constrains state premium taxation on reinsurance to avoid double taxation, which will affect state tax revenue and competitive domiciling strategies.
More articles like this one.
A weekly email with all the latest developments on this topic.
What This Bill Actually Does
The CART Act defines a ‘‘catastrophic risk transfer company’’ as a domestic corporation organized under a state law that permits special‑purpose insurers and licensed by the state insurance regulator. The corporate vehicle is limited in purpose: it must principally carry out transfers of catastrophic risk and restrict activities to issuing securities, holding highly liquid, investment‑grade assets, and entering into insurance or reinsurance agreements with unrelated counterparties.
The company must file an election to be treated under the new rules.
The bill ties federal tax treatment to the company’s economic role. A CART company will be subject to a modified corporate tax regime: it is taxed like a corporation but its taxable income is computed with specific carve‑outs and limits (for example, some typical corporate deductions are narrowed while issuance‑related and service provider costs tied to securities offerings are allowed).
The statute requires the company to manage its distributions and earnings so that its tax status is preserved; it also provides an administrative pathway if the income composition test is missed — disclosure plus a remedial tax can preserve continuity in some cases.At the investor level, the company must categorize and report dividend components to security holders (interest, tax‑exempt interest, qualified dividend income, other dividends, capital gains, insurance/reinsurance premium‑sourced amounts). Holders are taxed as if they received those components directly, so tax treatment follows the character the company reports.
The bill also creates timing rules that allow certain dividends declared and paid within a post‑year deadline to be treated as paid in the prior taxable year for both the company and holders, subject to an election mechanism.On cross‑border and state tax rules, CART narrows chapter‑3 and chapter‑8 withholding on a defined ‘‘qualified investment income’’ portion of dividends paid to certain foreign persons, subject to exceptions and documentation requirements. At the state level the bill prevents non‑domiciliary jurisdictions from imposing premium taxes on reinsurance paid to a CART company, and caps any permissible tax at a level tied to the tax that would apply to a foreign reinsurer, limiting double taxation concerns.
The Five Things You Need to Know
The bill requires that at least 90 percent of a CART company’s gross income come from qualified investment income and specified insurance or reinsurance premiums for it to qualify.
To maintain special treatment, the CART company must pay (and claim as a deduction) dividends equal to at least 90 percent of its CART taxable income for the year.
For a risk to qualify as a catastrophic direct‑insurance risk, the potential loss must exceed $25,000,000; premiums from companies count toward the income test only if the company’s assets exceed $100,000,000 or the risk is a sufficiently large, homogeneous pool.
The CART taxable‑income computation disallows a net operating loss deduction (section 172) and many typical corporate deductions, while specifically allowing certain issuance and service provider expenses tied to securities offerings.
Qualified investment income dividends distributed by a CART company are exempted from the usual withholding tax on nonresident aliens and foreign corporations, subject to narrow documentation and related‑party exceptions.
Section-by-Section Breakdown
Every bill we cover gets an analysis of its key sections.
Short title
Names the statute the Catastrophic Risk Transfer Act of 2025 (CART Act of 2025). This is purely captioning but signals the bill’s focus on creating a federal framework for catastrophic‑risk SPVs.
Definition, eligibility and operational limits for CART companies
Defines a CART company as a domestic corporation organized under a state law that authorizes special‑purpose insurers and licensed by the state insurance regulator. The provision limits permitted activities to (a) issuing equity and debt, (b) holding highly liquid, investment‑grade assets, and (c) entering into insurance/reinsurance agreements with unrelated counterparties. It contains an election requirement and a rule treating a series or protected cell as a separate corporation for tax purposes when its securities are linked to a designated pool of collateral. The section also authorizes a remedial disclosure procedure and a formulaic tax if the gross‑income composition test is missed, and it supplies key definitions (e.g., ‘‘catastrophic risk,’’ ‘‘qualified investments,’’ and ‘‘regulated insurance company’’).
Special tax computation, distribution rules, and compliance mechanics
Specifies that CART companies are taxed like corporations but with a modified taxable‑income computation: net operating loss deductions and many standard corporate deductions are disallowed, while dividends paid (and a suite of issuance‑related expenses) are treated specially. To preserve the tax regime, the company must meet a dividends‑paid requirement and keep earnings and profits consistent with CART treatment. The section also prescribes remedial procedures when tax status is jeopardized, an interest charge calculation on certain deferred distributions or misstatements, and rules that allow certain dividends declared late in a calendar year to be treated as paid in that year if paid by a statutory deadline.
Look‑through reporting and taxation for security holders
Requires CART companies to issue statements allocating each dividend among several tax categories (interest, tax‑exempt interest, qualified dividends, other dividends, capital gains, and insurance/reinsurance premium‑sourced amounts). Security holders are taxed as if they received those components directly, so character follows the reported category. The section also instructs how deductions like the dividends‑received deduction are to be computed in light of the passthrough characterizations.
Post‑year dividend timing election
Allows a CART company to treat certain dividends declared on or before a late filing deadline as paid in the prior taxable year — but only if the dividend is distributed within a specified post‑year window and the company makes an election on its return according to IRS regulations. This is a practical measure to align corporate reporting cycles with securities payoff schedules common in catastrophe securitizations.
Limited withholding exemptions for qualified investment income dividends
Amends chapter‑3 and chapter‑8 withholding provisions to exempt a defined ‘‘qualified investment income’’ portion of CART dividends from withholding when paid to certain foreign persons, subject to exceptions (related‑party holdings, documentation requirements and country‑specific withholding suspension periods). The exemption is tied to the company meeting its CART eligibility and reporting requirements for the relevant year and to the issuer’s statement to payors and holders.
State premium tax coordination and limitation
Prevents non‑domiciliary jurisdictions from imposing a premium tax on reinsurance premiums paid to a CART company; if a state does tax such premiums, the tax is capped at an amount no greater than what would be owed under the federal section that taxes foreign insurers, thereby limiting double taxation and reducing disincentives for domiciling CAT SPVs in states with favorable SPi statutes.
This bill is one of many.
Codify tracks hundreds of bills on Finance across all five countries.
Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Cedent insurance companies buying large, infrequent risk transfer: They gain access to collateralized SPVs that can spread or securitize risk, increasing available capacity and potentially lowering ceded reinsurance costs.
- Capital‑market investors in CAT debt/equity: Investors receive a structured vehicle with clear tax classification and look‑through reporting that can produce investment‑grade, investment‑income‑characterized returns and limited withholding for qualifying dividends.
- States and domiciles that authorize SPIs: States that have SPV enabling statutes can attract business from cedents and managers seeking favorable domiciles, increasing incorporation and service‑industry activity locally.
- Special‑purpose insurers and third‑party structurers: Entities that design and issue catastrophe securities get a federal tax wrapper that reduces uncertainty about investor tax character and allows certain issuance costs to be deductible.
Who Bears the Cost
- CART companies (and their managers): They face new compliance, reporting and distribution obligations, limitations on tax attributes (e.g., loss carryforwards) and potential remedial taxes if income composition tests fail.
- Investors and intermediaries buying CART securities: Holders must track, receive and account for detailed dividend component statements and meet documentation conditions to obtain withholding exemptions, increasing compliance burdens and KYC/documentation costs.
- Non‑domiciliary state treasuries: States that previously taxed reinsurance receipts from foreign reinsurers may see reduced premium‑tax revenue or be constrained to tax at a capped rate, altering fiscal planning.
- Traditional reinsurers: Increased capital and tax‑efficient SPVs could compress pricing or displace some reinsurance business, pressuring incumbent players to adapt product and capital strategies.
Key Issues
The Core Tension
The central dilemma is encouraging large pools of private capital to absorb catastrophic losses (which improves market capacity and social resilience) while avoiding a new tax‑favored conduit that erodes the corporate tax base, enables regulatory arbitrage across states and countries, or weakens incentives for prudent capitalization and solvency oversight.
The CART Act balances two objectives that pull in opposite directions: making catastrophe capacity attractive to capital markets while containing tax and regulatory exposure. The statute’s eligibility constraints (state licensure, activity limits, and collateralization) try to ensure CART entities are true risk absorbers rather than tax shelters.
But key terms and thresholds are open to structuring: the treatment of series/protected cells as separate taxable entities could be used to ring‑fence risks and shift income recognition; the permitted deduction of issuance‑related costs invites questions about what is ‘‘reasonably related’’ to issuing securities.
Operationally, the look‑through requirement that characterizes dividend components forces granular reporting from the issuer and complex compliance for holders, particularly cross‑border investors who must preserve documentation to rely on withholding exemptions. The ban on net operating loss deductions and the forced high‑rate dividend distribution requirement create capital management tradeoffs for CART companies (retain for solvency versus distribute to qualify).
Finally, the state premium‑tax cap reduces double taxation but may create a race‑to‑the‑bottom among domiciles and a loss of revenue for non‑domiciliary jurisdictions that historically relied on reinsurance tax receipts.
Try it yourself.
Ask a question in plain English, or pick a topic below. Results in seconds.