CART Act of 2025

This bill amends the Internal Revenue Code to create a tax system for catastrophic risk transfer companies (CARTs), which are special purpose insurers that issue securities and enter reinsurance agreements to cover large, low-probability losses, ensuring they have enough capital. It also limits state taxation of their reinsurance premiums.

Sec. 2, Taxation of catastrophic risk transfer companies: This section adds new rules to the tax code. A CART must be a domestic corporation organized under a state law for special purpose insurers, regulated by the state, and its main purpose is catastrophic risk transfer through issuing securities, owning qualified investments (cash, money market funds, investment-grade debt), and entering reinsurance agreements. To qualify, it must elect CART status, have at least 90% of gross income from investment income and certain reinsurance or insurance premiums, and fully collateralize its risk limit. Series of securities linked to a specific reinsurance agreement are treated as separate corporations. If it fails the income test due to reasonable cause, it can still qualify but pays a tax on the excess non-qualifying income. CARTs are taxed on their taxable income at corporate rates, but can deduct dividends paid (must be at least 90% of income) and certain expenses. Dividends declared by year-end and paid by the 15th day of the 9th month of the next year are treated as paid on December 31. Special rules allow CARTs to fix a failure to meet requirements by making a qualified distribution within 90 days of a determination, with interest. Security holders are taxed on dividends as if they received the underlying income types directly (interest, capital gains, etc.), and CARTs must report these portions. Dividends paid after the tax year can be treated as paid in the prior year if declared and distributed within specific timeframes. Nonresident aliens and foreign corporations are exempt from withholding tax on qualified investment income dividends from CARTs, with exceptions for related parties or certain foreign countries.

Sec. 3, State taxation of reinsurance premiums of catastrophic risk transfer companies: Only the state where the CART is organized can impose a premium tax on its reinsurance premiums. If that state does impose such a tax, the rate cannot exceed the federal tax rate that would apply to premiums paid to a foreign reinsurer.