CFC vs. NCFC vs. DOWC: What's the Difference?
These acronyms describe materially different ways dealers can participate in F&I product economics. Structure should follow strategy—not the other way around.
These acronyms describe materially different ways dealers can participate in F&I product economics.
They should not be selected simply because somebody says one structure produces a better tax result.
CFC — Controlled Foreign Corporation
A CFC reinsurance structure generally involves a foreign insurance company owned or controlled by U.S. shareholders.
The structure can allow the dealer to participate directly in insurance economics while operating within a specific legal, regulatory and tax framework.
CFCs have historically been common in dealer reinsurance. But foreign domicile does not mean "tax-free," and the tax rules surrounding CFCs are complex.
NCFC — Non-Controlled Foreign Corporation
An NCFC structure generally involves dealer participation in a foreign insurance company in which ownership and control are structured differently from a traditional dealer-controlled CFC.
Depending on the specific arrangement, dealers may own interests in a broader insurance company or participate through a structure designed so individual participants do not control the insurer.
The economics, liquidity, governance, investment flexibility and tax consequences need to be examined carefully.
DOWC — Dealer-Owned Warranty Company
A DOWC is fundamentally different.
The dealer-owned entity generally becomes the obligor on eligible service contracts rather than merely reinsuring another obligor's risk.
That can potentially give the dealer greater control over certain economics and operations. But more control can also mean more responsibility.
All need to be properly managed.
Which Is Best?
There is no universal answer. The right structure depends on factors including:
- Dealership size.
- Premium volume.
- Products.
- State footprint.
- Dealer objectives.
- Investment philosophy.
- Liquidity requirements.
- Risk tolerance.
- Exit strategy.
- Estate planning.
- Tax position.
- And desired level of control.
The Mistake to Avoid
Do not begin with:
Begin with:
Then involve qualified insurance, legal, tax and accounting professionals.
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