Life assurers never really had to worry about premium taxes in the European Union (EU) until the European Court of Justice (ECJ) released its findings in February 2013 (RVS Levensverzekeringen NV v Belgium (Case 243/11)). The new interpretation of the Location of Risk (LoR) rules now means that Life assurers need to consider EU compliance requirements in their day to day business, namely whether other EU premium taxes have been triggered as a result of a policyholder relocating or retiring to another EU country.
This article shall address:
- What is the new interpretation of the rules and why are these important?
- What are the implications for the life assurer in respect of day to day compliance?
- Is there an additional administrative burden?
- What premium taxes are due in the EU in respect of life assurance?
These considerations will impact life assurers that write life assurance policies under FoS.
Life assurance - An overview
Life assurance can mean one of two things depending on who you talk to. It may mean all nine classes of long-term business as defined in the EU life directive 2002/83/EC (Annex 1) or it may mean Class 1 only, life and annuity business. FiscalReps takes the former approach and we shall adopt this in the article. This is consistent with the tax authorities view of who administers and enforces the premium tax or levy/contribution. For example, the Bank of Greece, which is responsible for the Private Life Insurance Guarantee Fund (PLIGF), refers to ‘life’ insurance in the relevant legislation but confirmed to us in our meeting in October 2014 that ‘life’ should be interpreted as all nine long-term classes.
For reference, these are:
- Class 1 Life & Annuity
- Class 2 Marriage & Birth
- Class 3 Linked Long-Term
- Class 4 Permanent Health
- Class 5 Tontines
- Class 6 Capital Redemption Contracts
- Class 7 Pension Fund Management
- Class 8 Collective Insurance
- Class 9 Social Insurance
Interestingly, it became apparent when talking to the various EU authorities that not all classes are recognised in individual EU Member States. For example, the Dutch Insurance Premium Tax (IPT) authorities do not recognise Classes 2, 3, 6, 8 and 9 in the Netherlands and, as such, the following footnote was added to the FiscalReps Dutch rate table:
“If the insurance cover falls within article 24 (1) of the legislation then an exemption is available. If there is any uncertainty then the tax authorities will review the terms and conditions of the relevant insurance policy to determine whether an exemption is available under the legislation.”
The ECJ Case
The ECJ’s Judgement concerned the interpretation of Article 1 (1) (g) and Article 50 of the life assurance directive 2002/83/EC, which provides the member state with the exclusive right to apply indirect taxes and parafiscal charges to life assurance policies. The case examined policyholders who first took out a life assurance policy in the Netherlands when habitually resident and then subsequently relocated to Belgium. This applied to individuals rather than establishments. Whilst the Netherlands does not apply IPT to life policies, Belgium applied the 1.1% IPT at the time.
Article 1 (1) (g) and Article 50 (3) provide that the member state having exclusive taxation rights is the member state of commitment i.e. the member state where the policyholder has his/her habitual residence. The key question was whether the premiums should be subject to the premium tax regime in the Netherlands, i.e. where the policyholder was resident when the policy was taken out, or in Belgium where the policyholder relocated. The ECJ ruled that a dynamic interpretation of Articles 1 (1) (g) and 50 should be taken. The member state of commitment should be the habitual residence of the policyholder at the time of each premium payment rather than the member state of commitment determined by the habitual residence of the policyholder at the time the contract was entered into.
Interestingly, Advocate General Kokott proposed the static interpretation and this was the first time Kokott’s opinion had been overruled. Furthermore, it is understood that the outstanding amount of IPT was EUR 5,000.
There are a number of questions that arise from the ECJ case that were not addressed:
- Could it be argued that the ECJ case applies to one or all nine long-term classes of business?
- Where is the LoR if an employer takes out a life policy on behalf of its employees who work overseas?
- Could insurers be liable for unpaid premium taxes, interest and penalty charges before 21 February 2013?
- Could double taxation arise based on the habitual residence rules?
What are the implications for life assurers?
The implications are far reaching for life assurers in respect of premium tax compliance.
Registration: As de minimis rules are rare in the EU, life assurers may be required to register for the relevant premium taxes and put in place the necessary arrangements to ensure that the tax is correctly paid and reported, as well as declaring any unpaid taxes. Furthermore, life assurers may not have a passport to write assurance business into certain EU countries and yet will need to evidence a passport in order to be registered. This is an unforeseen consequence of the ECJ case where individuals relocate and is proving a barrier to being compliant especially in countries such as France.
Administration: The administrative burden increases for life assurers as they will be required to monitor the changes in habitual residence for each of their policyholders and then apply the correct premium tax treatment based on the member state of commitment. This will involve keeping abreast of individual countries’ premium tax rules and the associated local rules for determining when habitual residence is or is not deemed to exist. For example, an individual is deemed to be habitually resident in Spain when residing for six months, whereas in the UK it is twelve. It may also mean that the reporting systems will need to be widened to evidence the LoR of an individual policyholder.
Commercial & Corporate Governance: Any under declarations may lead to penalty and interest charges (and potentially reputational damage) and similarly any over declarations may impact the profitability of the policies sold. Accurate pricing relieves these considerations and our table on the following page highlights the various premium taxes that impact life assurance in the EU, Switzerland and Liechtenstein.
Such additional compliance costs will need to be addressed in the pricing of policies.
Which premium taxes affect life assurance?
FiscalReps provides a long-term rate table to its life assurance clients that lists the premium tax rates by:
- Class of business
- Tax points
- Basis of calculation
This is based on researching the relevant legislation, authority guidance and, if applicable, case law. FiscalReps is currently in dialogue with all the authorities to ensure the rate table is accurate. Further to our meeting with the Belgian IPT authorities in Brussels in June 2014, our IPT rate table which covers complex legislation has been signed-off in writing. At this time, 13 EU countries, plus Switzerland and Liechtenstein, apply premium taxes or contributions to life assurance policies.
As noted above there are no de minimis rules and thus no threshold limits and life assurers should register with the relevant tax authority if there is any liability. You may note that there are two specific premium taxes in Ireland and Greece that are life premium taxes only, whereas the other premium taxes also apply to non-life insurance. Furthermore, there are some countries where premium taxes do not apply or exemptions apply, such as Germany and the UK.
Tax authorities and authorities will be alert to any non-compliance as a result of the ECJ case and it is important that life assurers are prepared for any future audits. The following is an extract from a recent IPT audit conducted by FiscalReps and it may be a useful exercise for a client to answer the following questions:
Is there a ‘business owner’ who has day-to-day responsibility for IPT?
A. If yes, who is it and how do they see their role? (summary of key responsibilities)
What are the terms of reference regarding their role and identified areas of accountability?
Where and how are records of management decision making instructions or key actions retained?
How long are they retained for?
What do they do to satisfy themselves that any associated tax risk is being effectively managed?
B. If no, then what is the reason for not having a ‘business owner’?
Who completes the IPT return?
The life assurer, if it is not doing so already, will need to consider numerous aspects to be compliant and may need to ask hard questions:
- Is there an EU exposure outside the home country?
If yes, is the life assurer registered with the relevant tax authority for premium tax purposes (ii) filing the relevant returns and (iii) making payment at the correct times?
- Is premium tax priced into the premiums?
- If not, what is the potential unpaid premium tax(es), interest and penalty charges?
- Can a Tax Authority Audit be satisfied?
It seems rather ironic that a local dispute between a tax authority and life assurers from a neighbouring country should have escalated to the ECJ and had such a profound effect on the life assurance market. The only other ECJ case that ever related to premium taxes was Kvaerner (2001) that proved to be a landmark decision in respect of the LoR rules for the non-life market. The RVS Levensverzekeringen NV case may not be a landmark case in the same manner but it does provide life assurers with a series of unwelcome challenges that need to be addressed whilst corporate governance is high on the agenda.