1. Introduction
On 21 February 2013 the European Court of Justice issued its judgment in the case of RVS Levensverzekeringen NV v Belgium (Case 243/11). This decision has implications for life assurers and composites who write life assurance policies under Freedom of Services. Such insurers may find they have obligations to pay premium taxes and/or para-fiscal charges in other EU Member States that hitherto they were not aware of.
Life assurance is subject to indirect taxes (e.g. premium taxes and parafiscal charges) in a number of EU Member States. The Member State in which such taxes arise, as provided for in the Life Insurance Directive, is the Member State of habitual residence for natural persons and the Member State of establishment for corporate policyholders. However, as this judgment now confirms, the determination of the Member State for such taxes is not fixed and can change if a policyholder relocates to another Member State.
2. Technical analysis
This judgment concerns the interpretation of Articles 1(1)(g) and 50 of the Life Assurance Directive 2002/83/EC which determine the Member State having the exclusive right to apply indirect taxes and para-fiscal charges to life assurance policies. The case concerned policyholders who first took out a life assurance policy when habitually resident in The Netherlands and then subsequently relocated to Belgium. While The Netherlands does not subject life assurance policies to indirect taxes or parafiscal charges, in Belgium such policies are subject to a 1.1% premium tax.
Member State Of Commitment – habitual residence
Articles 1(1)(g) and 50(3) together 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 annual premiums should continue to be subject to the indirect tax regime in The Netherlands (the Member State in which the policyholders were first resident when the policies were taken out) or in Belgium (the Member State to which the policyholders relocated).
The ECJ determined that the Member State of commitment should be considered as the habitual residence of the policyholder at the moment of each premium payment, rather than the Member State of commitment being fixed by the habitual residence of the policy holder when the contract was originally entered. Therefore, in this case, premium tax was payable in Belgium on premiums paid during the policyholder’s habitual residence in Belgium. This Judgment therefore validates a “dynamic” interpretation of Article 1(1)(g) and Article 50 of Directive 2002/83/CE, rather than the “static” interpretation proposed by Advocate General Kokott on 6 September 2012.
In reaching its decision the ECJ appears to have been influenced by the criterion selected by the EU legislature (namely the Member State of habitual residence) - which makes no reference to the habitual residence at the time of conclusion of the contract and, by its very nature, is a criterion that can change over time - and the chargeable event for indirect taxation of life assurance which, for Belgium at least, may not be the conclusion of the assurance contract but rather the payment of the assurance premium.
3. Implications for life insurers
This decision has implications for life insurers in terms of pricing and costs and therefore profit margins. It can be seen as increasing the administrative burden on life assurance companies who will have to monitor the changes in the habitual residence of each of their policyholders (natural persons) and then apply the correct tax treatment to each annual premium based on the current Member State of commitment. The latter will necessitate keeping abreast of the indirect taxes and para-fiscal charges applied to life assurance in other Member States and the associated local rules for determining when ‘habitual residence’ is or is not deemed to exist (the latter rules may vary between Member States). Such additional costs, as well as the tax itself, will need to be addressed in the pricing of policies.
As de minimis rules are rare in the EU insurers may be required to register for relevant taxes and put in place the necessary arrangements to ensure that the tax is correctly paid and reported as well as declare any unpaid taxes (plus potential interest and penalty charges). This will clearly present a challenge to life insurers who historically may have applied the static interpretation and as a result may now need to assess whether they have premium tax obligations and liabilities in other Member States.
4. Going forwards
If this judgment affects your business FiscalReps is well placed to assist you, for example by providing consultancy services (e.g. advice on relevant taxes applied to life assurance across the EEA) or by a providing an outsourced fiscal agent/representative tax compliance service.