German insurance managers will have to ‘box clever’ with tax reform

It seems unlikely currently that the German tax authorities will bow to pressure from representative bodies of the entire German insurance community to amend, or at least clarify, its recently passed controversial Insurance Tax Law Reform (VersStG) to prevent German companies with insured overseas operations paying tax twice – at home and overseas. The German insurance management association (the GVNW) was joined by all leading players including the German Insurance Association (the GDV) when it pointed out that the new reform could lead to double taxation if applied strictly as it was passed at the end of last year. Experts agreed that if the insurers interpret the new rules strictly, then insurance managers will 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 is currently great uncertainty about how the rules will be applied in practice, with little clear guidance from the tax authorities. The GVNW has naturally 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. It is thought that the GDV has sent a set of questions to its members asking how they intend to interpret the reform too, but details are currently not available. Some experts believe that over time, the rules could be amended to prevent the double taxation problem from occurring, so it makes sense for the GVNW to keep up the pressure on the authorities. But insiders fear that, now the matter is out in the open, the insurers may have no option but to apply the new rules strictly to avoid falling foul of compliance rules. To be 100% compliant in such a vague situation, insurers would have to try and cover all foreign operations locally. But as German market sources pointed out, even the biggest international insurers do not have offices all over the world and adequate local capacity simply does not exist. “Sometimes, stones are perhaps best left unturned,” as one senior German insurance executive told CRE Deutsche off the record. The GVNW first raised the alert about this tax reform back in November, when it wrote to members warning them of the potential for double taxation. It, and the Federation of German Industries (BDI), together wrote to the Federal Ministry of Finance (BMF) in April last year and criticised the new regulation in Section 1, Paragraph 2, Sentence 2, No. 4 of the VersStG. “This regulates that in the future, German insurance tax will have to be paid for the insurance of permanent establishments of German companies that are outside the European Economic Area (EEA) (e.g. the US). This only applies if they are also insured via a German (or European) insurance policy. However, this tax liability applies regardless of whether insurance tax is already paid in the third country for allocated premium shares,” explained the GVNW in a further note to members issued in November. “From the point of view of the GVNW and the BDI, this new regulation can lead to the risk of double taxation. This was also pointed out at a public hearing of the Bundestag Finance Committee,” continued the association. The GVNW explained that the wording of the law refers to “permanent establishments”. According to Section 12 of the German Tax Code, the “permanent establishment” is defined by law as a permanent business establishment serving the activities of a company. A “permanent establishment” can generally be understood as a dependent part of a company, which is characterised by the fact that it presents itself as a fixed business facility or facility from which business activity is carried out with a certain degree of continuity. However, as the GVNW further pointed out, construction work and assembly work are also deemed to be permanent establishments if these are operated for longer than six months. The GVNW advised members to approach their broker and insurer and check whether their company will be subject to German insurance tax in future for permanent establishments outside the EEA that have been co-insured. “The insurance of these permanent establishments or their charges with insurance premiums may have to be adjusted. In addition, we recommend talking to your internal and external tax experts about the new law and its tax and actual effects on your company,” stated the GVNW. Leading independent German broker Funk Gruppe, based in Hamburg, advised German insurance managers to discuss options with their broker as soon as possible. Nadine Benkel, assistant to the management board at Funk, told CRE Deutsche this week that the problem is real and should not be ignored by GVNW members and the wider German business community that operate on a cross-border basis and want to efficiently cover their risks. “Depending on the legal situation in the third country, our clients have to pay 19% insurance tax in Germany on top of local taxes in respect of DIC/DIL master agreements [difference-in-conditions/difference-in-limits insurance],” she explained. “If a German policyholder has insured a subsidiary in a third country from Germany… the answer to the question of whether subsidiaries qualify as permanent establishments within the meaning of the reform of insurance tax law is legally controversial. Nevertheless, in practice – due to European and German case law – there is currently a broad interpretation according to which subsidiaries qualify as permanent establishments,” continued Ms Benkel. This broad interpretation could give the market ‘wiggle room’ and see an evolution over time that could ultimately see the double-taxation problem tackled, suggested Ms Benkel. For now, the insurers are playing safe but this could change over time, she suggested. “In order to avoid tax compliance risks, according to current market observations, insurers have also decided on this broad interpretation and therefore also levy German insurance tax. However, the question of the definition of permanent establishments is not yet legally certain. Therefore, it cannot be ruled out that the interpretation will change over time in the course of test cases. If companies deviate from the interpretation and do not want to pay the insurance tax, a so-called declaration of exemption can serve as a remedy, with which companies exempt the insurers from the domestic or foreign tax authorities,” she added. Ms Benkel said the first thing that a German insurance manager needs to do is contact their insurance broker or insurer to check the contracts individually. From a bigger-picture perspective, she said this does not necessarily mean that global programmes no longer make sense for German companies, despite the current uncertainties. “Global programmes still make sense and are very important for German companies, especially to cover insurance risk in foreign countries,” she said. And, while currently there are no indications from the BMF that it is prepared to be flexible on this significant change, Ms Benkel thinks this could change over time. “Insurers and German business representatives have criticised the law. In my opinion, there will be some modifications within the coming years because there are many unanswered questions,” she told CRE Deutsche. Praveen Sharma, global leader of the insurance regulatory and tax consulting practice at Marsh, said the confusion over the interpretation of this tax reform is causing real headaches for German customers and insurers, and stressed the need for more clarity from the German tax office. “The German tax authorities have not provided clarity on how the German premium tax rules should apply when a German master and excess policy covers risks (such as D&O or liability) of group subsidiaries located in non-EU countries such as the UK on a non-admitted basis. Unfortunately, the way in which the German tax law and follow-up guidance has been worded is creating confusion in the insurance industry, and an inconsistent approach is being applied by the global insurers,” he told CRE Deutsche. Mr Sharma gave an example of how a German company could find itself faced with double taxation under the current situation. “This new provision will lead to double taxation for many multinational companies that have operations in non-EU/EEA countries and where an EU/EEA insurer covers those operations under the German master and/or excess layer policies issued to the German policyholder. Depending on the class of risk, the structure of the insurance programme and the location of risk, the multinational company may also have to pay premium tax in the non-EU/EEA country on the same allocated premium,” he explained. “For example, a German policyholder has a subsidiary and/or branch in the UK and arranges a product liability master/excess layer policy with an EU/EEA insurer that covers the subsidiary/branch’s liability in the UK (following Brexit, the UK is not in the EU/EEA). Consequently, the German premium tax of 19% will be payable on the allocated premium. Unfortunately, due to the UK premium tax legislation, the same allocated premium (whether internally recharged or not) will also be subject to UK premium tax of 12%. Although the obligation to pay the German and UK premium taxes to the tax authorities lies with the EU/EEA insurer, in all cases the insurers will pass on the actual premium tax burden to the German policyholder,” continued Mr Sharma. The insurance tax expert advised German multinational companies to review their global insurance arrangements and their premium allocation methodology in light of the changes. “They should consider their total cost of risk, including tax on the various options that may be available, with the help of their brokers and global insurers involved. It should be noted that localising all layers of the global programme will not be possible and will be uneconomical,” he said. As for potential amendments to the new reform to sort out the double-taxation threat, Mr Sharma advised a unified industry approach. “It will depend on the motivation of the authorities to do so. It is unlikely to change until the German multinational companies and global insurers unite and obtain a formal ruling from the German courts,” he said, thereby suggesting that there will be no quick fixes for this serious problem for the German insurance management community.

German insurance managers will have to ‘box clever’ with tax reform

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