MAIDEN HOLDINGS, LTD.

Taxation

Under current Bermuda law, Maiden Holdings and Maiden Bermuda, have received an undertaking from the Bermuda government exempting them from all local income, withholding and capital gains taxes until March 31, 2035. At the present time, no such taxes are levied in Bermuda. Maiden Holdings and Maiden Bermuda believe that they operate in a manner such that they will not be considered to be engaged in a trade or business in the U.S. Accordingly, Maiden Holdings and Maiden Bermuda have not recorded any provision for U.S. taxation.

Our U.S. subsidiaries are subject to federal, state and local corporate income taxes and other taxes applicable to U.S. corporations. The provision for federal income taxes has been determined under the principles of the consolidated tax provisions of the U.S. Internal Revenue Code and Regulations. Should our U.S. subsidiaries pay a dividend outside the U.S. group, withholding taxes will apply. Tax years 2012 through 2016 are not under examination but remain subject to examination in the U.S by the Internal Revenue Service. All prior tax years have been audited and closed without any impact on our operations.

The Company has subsidiary operations in various other locations around the world, including Australia, Austria, Germany, Ireland, Netherlands, Russia, Sweden and the U.K., that are subject to relevant taxes in those jurisdictions. These subsidiaries are not under examination but generally remain subject to examination in all applicable jurisdictions for tax years from 2013 through 2017.

Deferred income taxes have not been accrued with respect to certain undistributed earnings of foreign subsidiaries as it is the intention that such earnings will remain reinvested or will not be taxable. If the earnings were to be distributed, as dividends or otherwise, such amounts may be subject to withholding tax in the country of the paying entity. Currently, however, no withholding taxes have been accrued.

There were no unrecognized tax benefits at December 31, 2017, 2016 and 2015. (Loss) income before taxes and income tax (benefit) expense for the years ended December 31, 2017, 2016 and 2015 was as follows:



For the Year Ended December 31,	2017			2016			2015
(Loss) income before income taxes – Domestic (Bermuda)	$	(165,120	)	$	67,881		$	134,012
Loss before income taxes – Foreign (U.S. and others)	(8,183		)	(18,169		)	(7,690		)
Total (loss) income before income taxes	$	(173,303	)	$	49,712		$	126,322

Current tax expense – Domestic (Bermuda)	$	—		$	—		$	—
Current tax expense – Foreign (U.S. and others)	669			490			780
Total current tax expense	669			490			780

Deferred tax expense – Domestic (Bermuda)	$	—		$	—		$	—
Deferred tax (benefit) expense – Foreign (U.S. and others)	(4,227		)	1,084			1,258
Total deferred tax (benefit) expense	(4,227		)	1,084			1,258

Total income tax (benefit) expense	$	(3,558	)	$	1,574		$	2,038

The following table is a reconciliation of the actual income tax rate for the years ended December 31, 2017, 2016 and 2015 to the amount computed by applying the effective tax rate of 0.0% under Bermuda law to income before income taxes:



For the Year Ended December 31,	2017			2016			2015
(Loss) income before income taxes	$	(173,303	)	$	49,712		$	126,322
Less: income tax (benefit) expense	(3,558		)	1,574			2,038
Net (loss) income	$	(169,745	)	$	48,138		$	124,284
Reconciliation of effective tax rate (% of income before income taxes)
Bermuda tax rate	—		%	—		%	—		%
U.S. taxes at statutory rates	2.8		%	(10.8		)%	(2.2		)%
Rate change in the U.S.	2.9		%	—		%	—		%
Valuation allowance in respect of U.S. taxes	(3.4		)%	13.2		%	3.2		%
Other jurisdictions	(0.2		)%	0.8		%	0.6		%
Actual tax rate	2.1		%	3.2		%	1.6		%

16. Taxation (continued)

Deferred income taxes reflect the tax impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. The significant components of our deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows:



December 31,	2017		2016
Deferred tax assets:
Net operating losses	$	39,923	$	63,143
Unearned premiums	6,537		11,336
Discounting of net loss and LAE reserves	12,222		12,091
Accruals not currently deductible	65		160
Retro reinsurance adjustment	4,481		2,679
Amortization of intangible assets	1,180		2,439
OTTI	—		1,198
Others	797		610
Deferred tax assets before valuation allowance	65,205		93,656
Valuation allowance	51,073		78,300
Deferred tax assets, net	14,132		15,356
Deferred tax liabilities:
Deferred commission and other acquisition expenses	6,927		11,826
Intangible assets with indefinite lives	1,050		1,750
Amortization of goodwill	6,384		9,480
Reserve change in basis	5,076		—
Net unrealized gains on investment	1,141		2,713
Others	434		730
Deferred tax liabilities	21,012		26,499
Net deferred tax liability	$	6,880	$	11,143

Pursuant to the Tax Cuts and Jobs Act of 2017, the U.S. corporate tax rate is reduced from 35% to 21% effective January 1, 2018 and as a result the Company recorded a write-down of its U.S. deferred tax liability of $4,956 resulting in a lower income tax expense of the same amount during 2017. The net deferred tax liability at December 31, 2017 was $6,880 (2016 - $11,143). A valuation allowance has been established against the net U.S. deferred tax assets which is primarily attributable to net operating losses, unearned premium and loss reserve discounting. At this time, we believe it is necessary to establish a valuation allowance against the net deferred tax assets due to insufficient positive evidence regarding the utilization of these losses. During 2017, the Company recorded a net decrease in the valuation allowance of $27,227 (2016 - decrease of $545) which includes the impact of the rate change of $34,049. At December 31, 2017, the Company has an available net operating loss carry-forward of approximately $189,891 (2016 - $180,408) for income tax purposes which expires beginning in 2029.