German multinationals with insured risks outside of the European Economic Area (EEA) will still face double taxation in non-EEA territories such as the US and UK under the Insurance Tax Modernisation Act that came into force at the end of last year.
This is a blow for German insurance managers, who are meeting virtually this week for the annual GVNW Symposium. But a leading insurance tax expert has already suggested that the Act as clarified could well contravene OECD rules and thus could still have to be changed.
The GVNW was joined by all leading market players including the German Insurance Association (the GDV) earlier this year, when it pointed out that the new reform could lead to double taxation if applied strictly as it was passed.
Experts agreed that if the insurers interpret the new rules strictly, then insurance managers would have to pay tax in Germany for the premiums allocated to operations – potentially branches and subsidiaries – based in third countries and also potentially locally too.
There was great uncertainty about how the rules would be applied in practice, with little clear guidance from the tax authorities.
The GVNW sought clarity from the leading international insurers on how they will deal with this, clearly hoping that they will take a pragmatic approach to the new rules as has been the case in the past.
Clarity was finally received following the release of an FAQ document between the GDV and the German Ministry of Finance (BMF) in June 2021. The GDV had sent more than 100 questions on the Act.
Lloyd’s this week updated its guidance in accordance with the clarification provided by the BMF and it seems that the news is not that positive for German insurance managers with non-EEA risks within their progammes, based on analysis of the Lloyd’s note shared with Commercial Risk Europe by Praveen Sharma, managing director, global leader insurance regulatory and tax consulting practice at Marsh.
In its guidance note, Lloyd’s accepts that German premium tax will not be applied on policies issued to a German policyholder that also covers the risks of non-EU subsidiaries on the basis that the latter are not “permanent establishment” under the provisions of the German Income Tax Act.
Mr Sharma explained, however, that this will only apply to master and excess policies issued to the German policyholder by an EU resident insurer. “While no German premium tax will be payable on the premiums allocated under the German master or excess policies to the non-EU subsidiaries, the latter may still be liable for premium taxes in their own country of residence, such as in the US, Canada, Australia, Chile, Peru, the UK et al,” said the insurance tax expert.
“However, any premiums allocated to non-EU branches of the German policyholder will be subject to both German premium tax plus the applicable premium taxes in the country in which the non-EU branch is based. Hence, the German multinational company will suffer double taxation on the same premium. Many German financial institutions have foreign branches for operational and capital efficiency and could therefore be affected by the new premium tax provisions,” continued Mr Sharma.
The recent hardening of the market and need for many German companies to seek speciality coverage in markets outside of the EU will likely make this problem worse.
“Furthermore, if master and excess policies are issued to a German policyholder by a non-EU insurer – and this has become quite prevalent in the current insurance market conditions due to capacity constraints – then the whole of the premium will be subject to German premium tax. As the policy no doubt covers the risks of group subsidiaries and branches in other countries, then any premiums allocated to those risks may be subjected to local premium taxes – leading to double taxation of the same premiums,” explained Mr Sharma.
The fact is that, following Brexit, any UK-resident insurer is not licensed to cover risks in the EU. Thus, if a UK insurer issues a policy to a German policyholder to cover risks in the UK and the rest of the world, then as per the Insurance Tax Act (Section 1, paragraph 3.1) all of the premiums would be subject to German premium tax. The group subsidiaries and branches of the German policyholder may be liable to premium-related taxes in their own country of residence, added Mr Sharma.
“Hence, it would seem that the risk of double taxation of German master and excess policies, particularly involving non-EU insurers, remains for German multinational companies,” he continued.
GVNW members should not give up hope of addressing this problem, however, suggested Mr Sharma as he believes that, as the law currently stands, it contravenes OECD principles, so should be rectified.
“Any solution to rectify this anomaly must be addressed by the BMF soonest, as the way in which the law is constructed probably goes against the principles of the OECD, which is keen to ensure that multinational companies should pay a fair share of tax wherever they operate,” said Mr Sharma.