Bermuda business has launched a campaign to water down proposed tough US legislation aimed at cracking down on hedge fund reinsurers.

The Association of Bermuda Insurers and Reinsurers (Abir), led by president and executive officer Bradley Kading, petitioned the US Senate this month to head off pending legislation sponsored by Oregon Democratic Senator Ron Wyden.

Sen Wyden has proposed an Offshore Reinsurance Tax Fairness Act, a bill designed to counter what he called abuses by new offshore companies.

The senator claimed that hedge fund managers can lower the tax rate they pay on profits and postpone bills by channelling investments through reinsurers in offshore locations like Bermuda.

Sen Wyden said it is a form of tax evasion, and claimed these firms carry out minimal reinsurance activity.

Under his bill, a company could not qualify as a bona fide insurer for tax purposes if insurance liabilities are less than ten per cent of assets and when the ratio is ten per cent to 25 per cent a decision would be made on “facts and circumstances.”

Insurance firms managing liabilities of more than 25 per cent of assets would be regarded as legitimate under the Wyden bill.

But Abir and Mr Kading lobbied congressional staff and argued that the Wyden provisions would damage the commercial insurance and reinsurance markets — and proposed amendments.

Abir has written to the US Treasury proposing that if the US goes down a ratio-based route for tax it should adopt a “bright line harbour test” of a 15 per cent reserves to assets ratio.

Mr Kading said: “We had some useful meetings. The work is ongoing.”

He added: “The staff were open to comment — they understand that they are not tactical experts on reinsurance.

“They have a very clear idea of what they want to do. They want to be able to target an entity where the predominant amount of its income is from the investment side with only a marginal side from insurance underwriting.”

The US Internal Revenue Service in April announced a proposed rule called “Exception from Passive Income for Certain Foreign Insurance Companies.”

The proposals aim to separate active insurance companies from those it is claimed exist only as vehicles for US hedge fund investors to shelter investment income from taxation.

The passive foreign investment company (PFIC) rules are designed to prevent American taxpayers from delaying US tax on investment income by holding investments through offshore companies.

But the PFIC rules do provide an exception for income generated from the active conduct of an insurance business.

It has been predicted that, if an international tax bill passes through Congress, the PFIC rules will be incorporated into that legislation.

Mr Kading said: “We think that’s what the advocates, particularly Senator Wyden, want to do with it.

“Our goal is to have the current proposals amended to narrowly target those entities the staff have identified that they want to target.”