☰A captive is taxed as what it is: an insurance company. The premiums your operating business pays are generally deductible as an ordinary business expense, the same as premiums paid to a commercial insurer, provided the arrangement qualifies as insurance for tax purposes. That qualification is the threshold question, and it turns on two tests the IRS and courts apply: risk shifting, meaning real risk actually moves to the captive, and risk distribution, meaning the captive pools enough exposures for the law of large numbers to operate. Premiums supported by sound actuarial analysis, coverage of genuine insurance risks, and day-to-day operation as a real insurance company also help substantiate the arrangement's treatment as insurance for tax purposes.
Once qualified, the captive itself pays tax on its underwriting and investment income under the insurance provisions of the tax code, which allow deductions for loss reserves that ordinary companies don't get. Domiciles add their own layer, typically a modest premium tax in place of state income tax. The structure of it all matters enough that tax counsel belongs on the program early, before feasibility to provide an official opinion and onward; Luzern coordinates that work with top tier specialist firms, all of which is included as part of the standard engagement.
This does not constitute tax or legal advice. Decisions regarding a Luzern captive will be made in consultation with legal counsel well versed in captive insurance law.