with the intended repeal at year's end of a vexing provision which required early declaration of a portion of income for US tax purposes.

And new US taxation rules may also have an effect on how US tax-exempt institutions invest in Bermuda insurers, a US tax expert said.

In the first matter, giant US companies like Marsh & McClellan, Johnson & Higgins and Aon all have insurance management companies in Bermuda whose clients were affected by the 1993 US legislation, The Omnibus Budget Reconciliation Act.

It caused US shareholders of what the IRS call a controlled foreign corporation (CFC) to include in income currently for US tax purposes certain earnings of the CFC, whether or not such earnings are actually distributed currently to shareholders, explained Ernst & Young Bermuda US tax specialist Patrick Hackenberg.

The US shareholders of Bermuda-based management companies were likely required to include in income their share of the CFC's earnings to the extent such earnings are invested by the CFC in excess passive assets, a term defined by the IRS.

Said Mr. Hackenberg, "They were being forced to pick up income for its passive assets, but not just passive income, but all income, because it had excess passive assets.

"Management companies don't have many active assets. Their active assets are people which are not included in the calculations. To the extent that more than 25 percent of their assets were cash, investments, or certain other passive investments, the IRS refused to allow them to defer that income offshore.

"The US shareholders were forced to pick up the income currently. Generally, the US international tax rules say that if you earn income within a country, you get to defer that income until it is sent back to the US.

"The 1993 provision said that if they had a lot of passive assets, the US shareholders wouldn't be allowed to keep deferring that income. You had to declare it and pay tax on it currently.

"It was just a horrible provision. It caused overlapping tax provisions on foreign companies and there were a bunch of calculations which had to be done.

Therefore the US government has decided to repeal it because it was just too onerous for these companies operating offshore.'' Meanwhile, in the other matter, tax exempt organisations such as schools, hospitals or pension funds that own shareholding in non-US insurers, will lose the privilege of not having to pay tax on their dividends, interest or underwriting income related to offshore insurance enterprises.

"If they set up a domestic insurer in the US, it would be subject to tax.

Simply by moving offshore, the rules say that any income earned offshore is deemed as a dividend, which was tax exempt.

"But the new rule has a `look through' provision, which says if you are a US shareholder in an offshore insurance business, they will look through to see the busi ness and tax it. You would probably have to own 10 percent of the voting shares of the company for this to apply.'' The new measures are contained in the Small Business Job Protection Act 1996.

Mr. Hackenberg said that "look-through'' provisions will affect captive and CAT reinsurers that have US tax-exempt shareholders.

The effective date is January, 1996. But if they only insure themselves and related entities, the tax should not apply. If they insure third parties, the "look through'' provision would automatically be applied.

He said, "Property catastrophe carriers definitely have third party business and pension funds or charitable organisations that own shares in those companies.'' Some captive companies may have third party business that they may no longer carry, as a result of the new rules.