Saudi TP for Captive Insurance: Substance and Pricing

Establish whether the arrangement is insurance before pricing it

A captive insurer provides insurance-type services mainly or exclusively to members of its group. That description does not by itself establish that every payment is an insurance premium or that the recipient should retain the whole underwriting result.

Section 8.7 of ZATCA’s Arabic Transfer Pricing Guideline, third edition 2024, requires identification of the actual commercial and financial relationships. The initial question is whether the transaction can properly be characterised as insurance. Once the transaction has been accurately identified, its arm’s-length price follows the most appropriate method under the general framework.

Explain the commercial purpose of the captive

The guideline recognises possible benefits from pooling group risks, reducing volatility, accessing reinsurance markets and obtaining cover that commercial insurers may not readily provide. Premium stability and group cash-flow considerations can also matter.

These commercial reasons explain why a group might establish a captive. They do not determine the amount each participant should pay or the return the captive should earn. Expected benefits should be connected to the actual arrangement and the parties receiving them.

Dariba recommendation: retain the decision papers, risk assessment and reasons for choosing the structure over available alternatives. Distinguish the group’s overall objective from the benefit and obligations of the Saudi participant whose payment is being reviewed.

Identify the insurance functions actually performed

Section 8.7 contrasts a captive’s actual activities with functions characteristic of a professional insurer or reinsurer. Relevant activities include product development, acceptance of insured persons, asset and liability management and reinsurance policy decisions. The analysis should establish what the captive itself does and what others perform.

Dariba recommendation: identify who evaluates the exposures, approves cover, sets or reviews premiums, manages claims and makes the material investment and risk decisions. Support the answer with the actual responsibilities and decision evidence.

An outsourced function requires examination of the arrangement and relevant control. Neither employing a service provider nor listing a function in the captive’s business plan establishes that the captive performs or controls it in substance.

Examine risk allocation and diversification rather than the entity label

The guideline discusses circumstances involving limited insurance activities and passive diversification of risks within the group. In those circumstances, limited remuneration for the insurance-type services actually performed may be appropriate. This is a conditional conclusion about the facts, not a rule that every captive is a routine administrative company.

Dariba illustration: an entity that mainly administers policies and passes exposures to others has a different role from an entity making substantive underwriting decisions and bearing the resulting financial obligations. This original comparison does not determine the result for a particular captive or prescribe a return.

Establish the actual contractual exposure, conduct and relevant risk control before attributing a residual profit merely because the entity is called an insurer.

Assess premiums against the actual cover and relevant evidence

The amended Bylaws’ comparability and method provisions apply after the insurance transaction is identified. A premium should be assessed by reference to the actual risks and terms. A superficially similar external policy can differ in its limits, exclusions, deductibles, period or claims obligations.

Dariba recommendation: document why an external quotation or other comparison is informative and explain material differences. Where specialist risk analysis supports the price, retain its assumptions and reconcile the proposed premium to the cover provided.

There is no universal captive premium percentage or standard cost-plus mark-up in the reviewed section. The appropriate approach depends on what is being priced and the reliability of the evidence, rather than the desired location of group profit.

Separate the captive’s reward from other group contributions

Central risk management, policy administration, funding and insurance risk bearing may involve different parties. The pricing analysis should explain each relevant contribution instead of assuming all value resides with the entity receiving the premiums.

Dariba analysis: paying an external administrator does not itself settle how the remaining return should be allocated. Conversely, group ownership does not remove the need to reward an actual service performed by another entity. Identify the functions, assets and risks attached to each dealing and avoid compensating the same contribution twice.

The financial records should allow a reviewer to follow premiums, claims, reinsurance and service charges. Their accounting presentation should support the analysis without replacing the actual characterisation exercise.

Review Saudi deduction and withholding consequences separately

An arm’s-length price does not automatically establish a Saudi deduction or remove withholding. The payment’s actual character, source and applicable rules remain relevant. A denied deduction also does not by itself prove that withholding previously due should be refunded.

Read the insurance and reinsurance withholding guide for that separate analysis. Treaty treatment requires the actual treaty and qualifying facts; the existence of a captive in a treaty jurisdiction is not sufficient by itself.

Dariba recommendation: reconcile the TP conclusion with the insurance contract, payment flows and each affected filing. This pricing analysis also does not establish insurance licensing permission or satisfy a separate regulatory approval requirement.

Maintain evidence of the arrangement throughout the period

Articles 14–17 of the Bylaws require relevant disclosure and supporting information. Keep the policy terms, functional analysis, pricing support and transaction records consistent. Review material changes in cover, claims responsibility, outsourcing and the parties’ roles.

Where the captive’s activities change, examine whether the previous pricing approach remains appropriate. A historical premium or service margin is evidence to assess, rather than an automatically acceptable answer for the next period.

Dariba analysis: a useful captive review begins with whether the insurance arrangement exists in substance, then explains its price and consequences. That sequence provides a firmer basis than benchmarking a premium before establishing what risk and service it actually purchases.