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Saturday, 27th April 2024 |
| Insurance premium tax - how to reduce your insurance costs |
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| Insurance premium taxes tend to attract little attention. However insurance is becoming an increasingly large part of the cost of doing business and inevitably planning to minimise its cost is becoming important Brian Daly writes. |
Harmonisation
In 1988 the EU took steps to harmonise the taxation of insurance premiums within the EU. The objective of the harmonisation was to ensure that double taxation of premiums did not occur through taxation in the insurer’s country and also in the insured’s country, and to ensure that there would be a level playing field for all providing insurance in any national state.
Since most countries charge some form of tax on insurance premiums harmonisation of this sort was essential if cross border marketing of insurance services throughout the community was to be made possible. Without harmonisation it might be uneconomic to provide cross-border insurance since there would be a real risk that the country in which the insurance company was located would levy a tax on the premium, and so would the country in which the insured person was located.
Without harmonisation, customers would find that the only economic method of obtaining insurance was to obtain it from an insurance company in their own country, thus ensuring at least only one tax charge.
One charge to tax only
The harmonisation adopted involved minimal interference with national rules. It did not seek to impose a detailed structure of tax as was done in the case of value added tax. Instead it laid down certain basic principles to which all national taxes on insurance premiums had to adhere.
The basic principle adopted was that taxes on premiums should be levied by the State in which the risk covered by an insurance contract was locaated. Under the harmonisation principle, the country in which the insurance company issuing the insurance policy is located is irrelevant to the question of which country may tax the premium income. By this means the harmonisation ensures that only one member state of the EU will levy a tax on any particular premium income, and that the tax will be levied at the same rate and on the same basis regardless of what country’s insurance company is earning the premium income.
There has been no attempt to harmonise the rates of taxation. These can vary widely amongst member states. They can also vary widely as between different types of insurance, since some member states charge different rates on different types of insurance.
Differing rates
The legality of charging different rates of insurance premium tax on different types of insurance was considered by the European Court of Justice in the case of Gil Insurances in 2003. There the court noted that because in the UK the rate of insurance premium tax was lower than the rate of VAT, there had been a tendency to restructure transactions which would otherwise have attracted VAT so that they took the form of insurance contracts, attracting instead the lower rate of insurance premium tax.
The reaction of the UK to this loss of VAT revenue was to introduce a new higher rate of insurance premium tax focused on those areas of the insurance market where this problem had arisen. The court upheld the right of the UK to have variable rates of tax on different forms of insurance in such circumstances. In that case also the Advocate General stated ‘Although insurance services are exempt from VAT they are not immune from other indirect taxes. It is open to member states to introduce their own indirect taxes on insurance contracts’.
Group insurance policy
Another recent European Court of Justice (14 June 2001) in the case of Kvaerner Plc dealt with what is probably a common situation, which is where the head office of a group of companies arranges insurance for all of its subsidiaries throughout the EU through a single contract.
Kvaerner Plc was a UK parent company. Amongst its group was a Dutch subsidiary, John Brown BV. Kvaerner took out insurance in the UK which covered inter alia the Dutch subsidiary. The Netherlands sought to tax part of the premium paid by Kvaerner that related to the Dutch company. In that case the court noted the definition in EU law of the place where a risk is situated, which is:
‘- The member state in which the property is situated, where the insurance relates either to buildings or to buildings and their contents, in so far as the contents are covered by the same insurance policy,
- The member state of registration, where the insurance relates to vehicles of any type,
- The member state where the policyholder took out the policy in the case of policies of a duration of four months or less covering travel or holiday risks, whatever the class concerned,
- The member state where the policy holder has his habitual residence or, if the policy holder is a legal person, the member state where the latter’s establishment, to which the contract relates, is situated, in all cases not explicitly covered by the foregoing indents’.
The court concluding said ‘Emphasis is placed on the place where the activity whose risk is covered by the contract is exercised. For that purpose, the legislature had recourse to the criterion of the policyholder’s habitual residence where he is a natural person and to the criterion of the establishment to which the contract relates where the policyholder is a legal person’.
In the Kvaerner case the policyholder was the UK Plc and the issue therefore was whether the Netherlands subsidiary of the Plc could be regarded as an establishment in the Netherlands of the Plc for the purpose of insurance premium tax. The court held that it did and that accordingly the Plc had an establishment in the Netherlands to which the policy related and the Netherlands were entitled to tax the appropriate portion of the premium.
Of course it followed from that that the UK, who had taxed the premium, were not entitled to tax the portion that related to the establishment in the Netherlands.
An important point made by the court was that ‘establishment’ in the context of insurance premium tax has a meaning peculiar to the context of that tax. Concepts that relate to other forms of direct taxation eg permanent establishment, cannot be applied in determining what constitutes an establishment for insurance premium tax purposes. |
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| Article appeared in the April 2004 issue.
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