Joseph Finbow, IPT assurance director – captive practice, and Karen Jenner, IPT client engagement directorat, TMF, on how to remain compliant with insurance premium tax rules
Compliance of global insurance programmes remains key for not just captives but all insurers, brokers and policyholders involved in any insurance placement. Although insurance premium taxes (IPT) due on insurance contracts and premiums should never be the main driver in global programme design, an understanding of the implications of differing coverage mechanisms utilised can allow more informed decisions around optimal programme structure.
A captive’s understanding of its parent’s business, footprint and appetite for insurance and risk management guides participation in insurance programmes to meet both the group’s specific needs and to complement commercial placements.
To keep things simple, there are three key areas a captive and its corporate should consider around IPT compliance when structuring global programmes:
- Product or class of insurance
- Where the risk is located
- Basis of coverage – eg local admitted policies, non-admitted insurance or other mechanisms common to global insurance.
A combination of the points mentioned above will determine the differing transactional taxes applicable, tax rates per jurisdiction and responsibilities for tax reporting/payment.
- IPT encompasses all taxes which apply to a single transaction or policy and is commonly applied on commercial and personal insurance contracts in Europe.
- Parafiscal charges are additional taxes which work in a similar manner to IPT, and include fi re brigade charges as well as motor and insurance supervisory charges, which contribute to supporting and funding local services. Other examples include pool contributions and additional premiums. GAREAT (a French terrorism pool) and Consorcio (a natural perils and terrorism pool in Spain) are not technically taxes but increase the invoiced amount of premium charged on a policy.
- Stamp duties are issued on a per policy basis, some calculated as percentages of premiums, others fixed flat fees which may only apply to new policies, not renewals. In Ireland, a €1 stamp duty applies to new policies issued only.
- Within the EU, insurance is exempt from VAT, with the numerous forms of IPT and parafiscal charges applying instead. Outside of Europe however, VAT, GST or other form of sales tax may be the predominant form of taxation on insurance transactions.
- Withholding taxes can apply on cross border insurance and reinsurance contracts to any premiums paid out of a country. Examples include Federal Excise Tax due on premiums leaving the US, or Federal Income Tax impacting premiums leaving Australia.
- Specific regional taxes may require consideration. In the US, state self-procurement taxes may apply where insurance is bought from outside of the US state where the risk is located. Surplus lines taxes can apply where no capacity is available in the state where the risk is located, and the insured purchases cover via an authorised broker.
With an understanding of the differing types of taxes that apply to insurance transactions, let’s consider the three key compliance considerations a captive or risk buyer should factor into programme design on their international insurance placements.
Product or class of insurance
The insurance product drives the complexity of the tax treatment. To demonstrate this, we will consider three different business lines.
- Motor insurance: The taxation of motor vehicles is normally complex and high. The taxation of its insurance is no different. There can be multiple taxes applicable in any one jurisdiction and typically tax rates are higher than for other non-life insurance business. In France, there are potentially up to five taxes and parafiscal charges which can add an additional cost of over 35% to the premium. The precise coverage provided, and type of vehicle insured, will change the tax treatment – motor damage cover for an electric vehicle will be taxed differently to fully comprehensive insurance for a diesel truck.
- D&O insurance: For these policies, the tax treatment in the EU is generally easier to apply, with typically a simple IPT and no parafiscals applied.
- Other products such as those under the marine and aviation umbrella may receive exemptions from IPT. However, the actual insurance coverage is key, with certain conditions needing to be met before exemptions can be applied, be that cross-border shipments or size and use of the vessels. Some aviation liability risks may well be considered general liability insurance, and as such aren’t exempt. Understanding the precise coverage is imperative in the application of any exemptions.
Location of risk
Understanding which jurisdiction(s) have the right to tax an insurance contract or premium is the basis for all other IPT discussions. If a UK insurer provides coverage to a UK policyholder for its UK risks, UK taxes will clearly apply. Multinational programmes, however, typically have the insurer, policyholder and insured entities or assets spread across the globe.
Class of insurance is particularly relevant in defining EU location of risk. EU legislation provides rules for identifying risk location across a number of categories: property location, vehicle registration location and location of the insured entity being most common. In Australia, taxes apply either where an insured is situated or where an insured event can occur within the territory.
In the US, the home state ruling allows commercial policyholders to be taxed in the state where they have their ‘principle’ place of business. This avoids the taxes of multiple states – surplus lines and self-procurement taxes – being charged.
In Europe, but outside of the EU, Swiss rules stipulate that stamp duty applies to either the Swiss insurer’s domestic portfolio or to any risks where a domestic policyholder has concluded with a foreign insurer.
The captive insurer domicile is also key in determining the coverage mechanisms deployed in a global programme, ie the basis of cover for the territories within scope. This will be key in identifying where non-admitted or freedom of services coverages, for example, can be utilised.
Basis of cover
- Local admitted policies: Here the captive is absolved of IPT responsibilities, saved in the jurisdiction where the captive is domiciled, if they are insuring risks in this location. The local insurer issuing the admitted policy will handle local IPT administration, or other such indirect taxes on insurance premiums.
- Freedom of services: European-based captive insurers benefiting from passporting rights can write insurance across EU/EEA on a freedom of services basis. Here, the party usually responsible for settling IPT is the insurer. So, any European insurer issuing a freedom of services policy covering risks in the EU/EEA will firstly need to identify, calculate and apply the correct taxes due, alongside any parafiscal charges, and then facilitate the collection and settlement of all relevant taxes with each individual EU tax regime where risks are located. The timely reporting and settlement of taxes must be adhered to, not only in line with tax authority periods and deadlines, which can differ per territory, but any delay in settlement of some parafiscals such as terrorism and natural perils pools could mean that coverage from that local pool is not guaranteed.
- Non-admitted insurance: IPT responsibilities for non-admitted insurance more often fall to the policyholder rather than an overseas insurer. In practical terms, writing EU business from a captive domiciled outside of the EU is a bigger challenge than for EU captives writing risks outside of the EU. If we exclude the regulatory position on non-admitted insurance – which is outside of our IPT compliance specialist remit – there are some solutions for non-European captives to file taxes on business written into some EU territories, but there is no consistent or harmonised approach.
For risks located within the UK, insurers anywhere in the world are required to register and file IPT with the HRMC. In some EU territories, the local policyholder can remit taxes, for example in Germany or Finland, though they will need to be prompt as IPT normally falls due in the month following the month the premium is paid to the insurer.
The Netherlands and Denmark are examples of EU jurisdictions which permit an unauthorised insurer to register and file taxes via a formal, joint and severally liable fiscal representative. This solution may be costly for a captive, though, and there may be some security required. For many EU/EEA territories, however, compliance is not possible for non-admitted insurance. In Southern Europe, eg Greece and Spain, this leaves the local policyholders potentially exposed in the event of a claim.
Outside of Europe, compliance obligations can fall to the policyholder, which, depending on the footprint and resourcing of local insured entities – the captive being well placed to understand – may or may not lead to an increased use of non-admitted insurance in programme design. One example is in Texas (and many other US states), where non admitted insurance can trigger a self-procurement tax which the local insured would need to file and settle.
The motivation for this is similar to the requirement in some jurisdictions for the appointment of a tax representative, ie tax authorities can struggle practically and legally to recover the tax from a non-resident entity. The local insured may need support and advice in filing taxes that could be new and unknown to them.
Indeed, they may not even realise that they have a tax obligation. Some territories charge additional taxes on non-admitted insurance – in Australia an additional federal income tax of 3% is applied. The authorities deem that 30% Australian income tax should be due on the perceived profit of premium paid outside of the territory, which is currently deemed to be 10% of the premium paid.
Where there is a sizeable risk and associated premium in Australia, this additional tax can prove costly on non-admitted risk. In Canada, the insured must register and pay taxes in every state where there is a risk where non-admitted insurance exists. The presence of a local broker can change this responsibility as well as the cost of the tax, with different rates potentially applicable to premiums arranged through brokers.
- Financial interest clauses (FINC): FINC insures a parent company for its financial interest in a subsidiary’s loss, with no local policy required. Effectively, the loss suffered by the subsidiary reduces the value of the parent company’s financial interest in that subsidiary. The captive is therefore no longer insuring the risk of the local operating entity, but rather the financial loss suffered by the parent. The tax treatment follows the location of the financial risk, ie tax is due on the premium allocated to the FINC in the domicile of the parent company. With a UK-based parent company, the most likely tax treatment is 12% UK IPT applied to the premium allocated to FINC.
The location of the parent can therefore have a big impact on the cost of IPT, for example across the EU, a parent company in Finland would see 24% IPT applied, whereas a parent company in Luxembourg could see only 4% IPT applied. It’s important to consider that, from an IPT perspective, this structure is substantially untested.
Neither local legislation nor tax office guidance specifically address FINC and we aren’t aware of any case law on it to date in the European Union. There is the potential precedent set by the Adidas Case – a tax office could argue that the tax treatment does not match the substance of the arrangement, though ultimately in the Adidas case the policyholder was successful in defending FINC. Conversely, from a regulatory perspective, FINC may assist where local regulations prohibit non-admitted insurance.
In conclusion, an understanding of the global footprint, risk appetite of the captive owner and the domicile, resource and licensing capabilities of its captive insurer can be key in programme design. An appreciation of the varying IPT responsibilities that can arise out of the numerous coverage mechanisms common to global insurance is also important in ensuring the programme’s compliance.