German buyers warned on cargo tax

German companies can make serious tax savings on cargo insurance because it is currently exempt from the 19% insurance tax levied on most business. But German risk and insurance managers need to make sure that the transactions are subject to “precise and appropriate” contract drafting to ensure they obtain the benefits on offer, according to Robert Armstroff, head of tecline and marine at German broker MRH Trowe.

“The tax treatment of goods transport insurance has become increasingly the focus of insurers and companies in the last two years as the regulations become stricter. In the course of global networking and international trade, it is becoming clear that goods transport insurance is not only essential to cover the significant risks of goods transport, but can also play a significant role in optimising the cost structure of companies,” said Armstroff in a recently published advisory note.

“A central aspect in this context is the possibility of saving considerable costs through the tax privileges of goods transport insurance contracts, particularly in the case of cross-border transport. According to Section 4 No. 10 VersStG, the insurance premium for such transports is not subject to insurance tax, which means a cost saving of 19% for the insurance customer for this portion of the transport turnover (purchasing and shipping of goods),” he explained.

But as Armstroff pointed out, these savings are dependent on “precise and appropriate” contract drafting, which not only minimises the risk of liability but also ensures that the tax advantages are fully exploited.

The broker said that a precise declaration of the contractual conditions is needed. The introduction of a general policy on a sales basis has reduced the administrative effort for customers, brokers and insurers, but the evolution of the contract content has led to some “tax detrimental” results, he warned.

“Examples of this are the insurance of presentations or the co-insurance of personal belongings of stand staff at trade fairs. Due to the joint and several liability of everyone involved in the contract, the insurers had to pay high back taxes,” said Armstroff.

“However, the insurance customer is always liable for tax. The further development of insurance conditions, particularly for the benefit of customers, can therefore have tax implications that should not be underestimated. ‘Tax infection’ can ultimately result in the entire contribution to the contract becoming taxable,” he warned.

Armstroff said that a key area for risk managers to look out for is the application of Incoterms, a set of internationally recognised rules that define the responsibilities of sellers and buyers in the export transaction.

“Goods transport insurance insures the majority of property damage regardless of the Incoterms regulations, but further damage can occur such as business interruption for which no cover has been purchased. Choosing the right Incoterm is just as relevant as the corresponding location description or the reference to the current ICC Incoterms 2020,” advised the broker.

“The Incoterms mainly regulate the organisation, bearing of costs and risk of transport. The term ‘free delivery’ is often found in the general terms and conditions, which is neither an Incoterm nor the same as ‘EXW’ (Ex Works). The term ‘free delivery’ falls within the scope of the German Civil Code (BGB), so special caution is required when doing business with foreign customers. Only the payment of costs is regulated here, while the risk of damage is transferred to the buyer during loading,” continued Armstroff.

“Even if there is an effective agreement on the Incoterm ‘EXW’ (Ex Works), the associated obligations are often not taken into account in the actual workflow of the insurance customer. Although according to ‘EXW’, the buyer is responsible for the danger during the loading process, the seller usually takes on this task,” he added.

Armstroff said that given these challenges, a “precise” approach is essential to avoid an unnecessary insurance tax bill on cross-border trade.

“A detailed risk analysis, the careful revision of existing policies and a precise declaration of the insurance components are the key to realising the maximum tax advantages while avoiding potential additional payments. Companies that consistently implement these measures not only save costs, but also strengthen their competitiveness – a decisive advantage in an increasingly complex market environment,” he concluded.