When are dividends from an insurance company subsidiary deductible in California?
Edvin Givargis Published 6 minute read
The short answer
Only through Revenue and Taxation Code Section 24410, and only in part. Insurance companies pay California's gross premiums tax instead of the franchise tax and are excluded from the combined report, so the intercompany elimination that absorbs most domestic subsidiary dividends never applies to a dividend from an insurer. What remains is the Section 24410 deduction: 85 percent of qualified dividends received from an insurance company in which the recipient owns at least 80 percent of each class of stock. Both adjectives carry weight. The dividend is qualified only after an overcapitalization test that phases the deduction down to zero for insurers whose premium writing is thin relative to their income, and no deduction at all is allowed for dividends attributable to premiums the insurer received from members of its own commonly controlled group, the rule that catches captives. A holding company modeling a large distribution up from an insurance subsidiary should assume full inclusion until each of these tests has been run.
Why the dividend is taxable in the first place
Under the California Constitution, insurers pay a gross premiums tax that is in lieu of the corporate franchise tax (Cal. Const. art. XIII, ยง 28). Because an insurance company is not subject to the franchise tax, it cannot be a member of a combined reporting group, no matter how unitary its operations are with the rest of the enterprise. That exclusion has a sharp consequence for distributions. The rule that spares most intercompany dividends, the elimination for dividends paid from unitary earnings and profits between combined group members (RTC 25106), requires the payor to be in the group. A dividend from an insurer to its noninsurer parent starts life fully includible in the parent's apportionable income, even though the same cash moving between two general corporations in the group would have been eliminated entirely. The same is true where a federal consolidated return includes a life group and a nonlife group side by side: the federal consolidation does nothing for California, and only the members of the California combined report get elimination treatment.
Section 24410 is the legislature's answer to that structural inclusion. The current version dates from 2004, after the courts struck down its predecessor, which had limited the deduction to dividends from insurers doing business in California, as unconstitutional discrimination (Ceridian v. Franchise Tax Board (2000)). The modern statute applies without regard to where the insurer operates, and in exchange it polices what kind of insurer, and what kind of earnings, can generate a deductible dividend.
The basic deduction: 85 percent, 80 percent ownership
For taxable years beginning on or after January 1, 2008, a corporation may deduct 85 percent of qualified dividends received from an insurance company if the recipient owns, directly or indirectly, at least 80 percent of each class of the insurer's stock (RTC 24410(a)). The ownership test is per class, so preferred stock held outside the group can break qualification even where common ownership is complete. The remaining 15 percent of even a fully qualified dividend stays in income, a permanent inclusion that belongs in any model of a distribution up from the insurance side of the house.
The overcapitalization phase-out
The statute's central anti-abuse device measures whether the dividend payor is actually in the insurance business or is an investment company wearing an insurance license. The test compares the insurer's five year average net written premiums to its five year average total income (RTC 24410(c)). If premiums are at least 70 percent of total income, the dividends are fully qualified. If premiums are 10 percent or less of total income, nothing qualifies. Between those lines, the qualified percentage is prorated: the dividend qualifies in the proportion the premium ratio bears to the 70 percent benchmark. An insurer whose balance sheet has swollen with investment earnings relative to its underwriting can therefore see the deduction shrink well before it disappears, and a fact often recited in distribution planning, that the dividend represents funds in excess of the needs of the insurer's business, is not itself the test. The statute asks about the composition of the insurer's income over five years, not the purpose of the particular distribution, and the two questions can produce different answers on the same facts.
The captive rule: intercompany premiums poison the well
Separately from overcapitalization, no deduction is allowed for dividends attributable to premiums received or accrued by the insurance company from members of its commonly controlled group (RTC 24410(d)). The disallowed portion is computed as the total dividend multiplied by the greater of the intercompany share of net written premiums or a risk-based ratio, the underwriting risk borne for group members for a property and casualty company or the corresponding reserve measure for a life company, with exceptions for reinsurance of risks that originated outside the group. At the far end of the spectrum the rule is absolute: an insurer that derives all of its premiums from members of its own group generates no deductible dividends at all.
Two features of the captive rule deserve emphasis because they defeat common planning instincts. First, tiering does not cleanse. A dividend that originates in a captive reinsurer and moves up the chain through a non-captive insurance company remains attributable to the intercompany premiums that funded it; running the same dollars through an intermediate insurer with genuine third party business does not convert them into qualified dividends. Second, the rule is tracing based, not entity based: even a predominantly third party insurer loses the deduction for the portion of its dividends attributable to group premiums.
The deemed dividend backstop
Keeping earnings inside the insurer is not a complete answer either. Section 24455 authorizes the Franchise Tax Board to include a deemed dividend in the parent's gross income where the insurance companies in the group have, in the aggregate, a capitalization percentage of 15 percent or less and a substantial purpose of the accumulation was the avoidance of income tax in California or any other state. The provision has no implementing regulations, and how often the FTB has invoked it is not publicly visible, but it sits in the statute as the counterpart to the overcapitalization phase-out: the deduction rules police distributions out of overcapitalized insurers, and the deemed dividend rule polices the decision never to distribute at all. A structure that parks earnings in thinly premium-supported insurance entities should be documented with both provisions in view.
Practice notes
The analysis runs in a fixed order, and each step needs its own workpaper. First, establish the baseline: confirm the payor is an insurer under the constitutional definition and therefore outside the combined report, because if the payor is not actually an insurer the entire framework changes, elimination may be available, and Section 24410 is beside the point. Second, test ownership class by class against the 80 percent requirement, including indirect holdings. Third, build the overcapitalization schedule: five years of net written premiums and total income for the payor, computed consistently, because the qualified percentage is arithmetic once the inputs exist and contestable forever if they do not. Fourth, trace the premiums: identify what share of the payor's premiums, and of the earnings behind the specific dividend, came from commonly controlled group members, and apply the greater-of formula rather than assuming the premium ratio controls. Fifth, remember that the character conclusions travel with the dollars through intermediate entities, so a multi-step distribution should be analyzed as a single flow from the original insurer to the ultimate recipient before any step is papered.
This article states the law as of September 14, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.