The Dutch Tax Plan 2021 can have a major impact on the LACDT recoverability assessment of Dutch insurers, especially combined with the SII amendments.
Within Solvency II, the Loss Absorbing Capacity of Deferred Taxes (LACDT) is an adjustment that insurance companies can apply to lower their Solvency Capital Requirement (SCR). In order to make use of this, insurers need to substantiate that, in a recoverability assessment, the fiscal loss arising from the SCR shock can be recovered with taxable profits. On Budget Day ('Prinsjesdag'), Tuesday 15 September 2020, the Dutch government has set out the main features of the government policy for the coming parliamentary session, including the Dutch Tax Plan 2021 (Belastingplan 2021). This plan contains some adjustments that can have a major impact on the LACDT recoverability assessment of Dutch insurers, especially in combination with the recent Solvency II amendments.
The recoverability assessment for LACDT has constraints similar to those for the deferred tax assets, which are set out in IAS12 and by the local tax laws. The main difference is that LACDT arises from Solvency II and so in case of inconsistencies with IAS12 or local tax laws, Solvency II is leading.
On 18 June 2019, the amendments on the Solvency II Delegated Regulations were published, including amendments to Article 207 about LACDT. With these amendments, additional requirements to the LACDT substantiation became effective as per 1 January 2020. To highlight a few, insurers now need to take into account the following restrictions in their projection of future taxable profits:
The Dutch Tax Plan 2021 presented on 15 September 2020, contains the following adjustments relevant for the LACDT recoverability assessment:
The proposal to not reduce the tax rate from 25% to 21.7% can increase the LACDT of insurance companies, as the a maximal LACDT of 25% will be applicable instead of 21.7%. However, reducing the carry forward annual compensation to 50% of the fiscal profits, will make the LACDT recoverability assessment more challenging. In contrast, the unlimited carry forward period will make it easier to substantiate the recoverability, but it is expected that only life insurance companies can profit from this as they have a long projection horizon. It is expected that non-life insurers won't benefit from the extended carry forward period as, in general, their main source of recoverability of LACDT is expected profits arising from new business; the projection horizon for these profits has been recently limited to 5 years by the Solvency II amendments.
For non-life insurers, the combination of the Dutch Tax Plan 2021 and the Solvency II amendments means that future profits arising from new business are restricted both in annual compensation and in projection horizon. For life insurers there will be a restriction in annual compensation, but not in projection horizon. Please note that with an increased projection horizon, the uncertainty in future profits should increase according to the Solvency II amendments.
In conclusion, it is expected that the Dutch Tax Plan 2021 can have a major impact on the LACDT recoverability assessment, especially for the non-life businesses. However, it is important to note that the Dutch Tax Plan 2021 is only effective once the Senate (Eerste Kamer) has accepted the proposal. In December 2020, the Senate will decide on this issue.
Dutch Tax Plan 2021: