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Finland: Insurance premium tax, location of risk (CJEU judgment)

Finland: Insurance premium tax, location of risk

The Court of Justice of the European Union (CJEU)—in a case concerning the location of risk for purposes of the insurance premium tax for insurance related to M&A transactions—held that the place of risk for insurance covering the contractual risks associated with the value of shares and the fairness of the purchase price paid is the place where the policyholder is established.

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The CJEU judgment is viewed as providing clarification for many other insurance programs. 

The case identifying information is: C-74-18 (17 January 2019)

Background

  • The taxpayer insurance company offers insurance products and has its head office in the United Kingdom. 
  • The insurance company is active in Finland, but does not have a separate physical branch there. 
  • The insurance company offers its clients insurance products, including an insurance policy for business acquisitions (this primarily concerns a warranty and indemnity insurance policy taken out by the vendor, a warranty and indemnity insurance policy taken out by the purchaser, and an insurance policy for tax liability). The insurance policies are intended to cover the risk associated with the value of shares and the right to insure the purchase price paid by the purchaser when certain predetermined circumstances occur.

The Finnish court sought clarity from the CJEU about the location of the risk associated with these types of insurance policies, when this involves parties in several countries. The Finnish court wanted to know whether Finnish insurance premium tax is payable if the policyholder is a Finnish company and the target company is a foreign legal entity, and vice versa. The questions referred for a preliminary ruling made a further distinction between the situation when the vendor is the policyholder and the situation when the purchaser is the policyholder. A distinction was also made between the acquisition of a business undertaking and the acquisition of shares.

In this case, there were multiple countries involved in the insurance, and a policyholder could seek coverage for a risk triggered by an event occurring in another country. For insurers and policyholders, the question is in which country is the insurance premium tax payable. The amount of tax payable can be considerable, and some countries do not have insurance premium tax, while others have rates above 20%.

CJEU judgment

In determining the location of risk for insurance premium tax purposes, the CJEU took into consideration the place where the activity is carried out, and whose risk is covered by the insurance contracts. In the case before the CJEU, the risk was associated with the value of shares, and the policyholder was covering itself against the risk that this value would decrease. In that respect, it appears to be irrelevant that such a decrease in value could be the result of an event occurring at or within a target company situated in another EU Member State.

The CJEU found that the taxpayer was offering insurance covering the contractual risks associated with the value of the shares and the fairness of the purchase price paid by the buyer when acquiring an undertaking. The CJEU decided that such an insurance contract would only be subject to the indirect taxes of the EU Member State where the policyholder is established.

KPMG observation

To date, there have only been two CJEU judgments addressing the place where risk is located for insurance premium tax purposes, and these cases did not provide clarity for each type of insurance policy as regards to where the insurance premium tax would be levied. It was clear from these judgments that global insurance programs could be subject to insurance premium tax in multiple countries where risks in multiple countries are covered. The position on the insurance premium tax treatment of risks associated with shareholdings seemed less clear. The latest judgment by the CJEU provides more clarity on such types of risks.

In practice, multinationals often have a combination of risks at the country level and shareholder risks, with premiums being allocated for insurance premium tax purposes among various countries and the shareholder. Based on the CJEU judgments to date, these risks would have to be allocated to the various countries and to the country where the shareholder is located. The challenge is to determine that such an allocation is appropriate and applied consistently.

Under the Dutch practice, if security provided for business acquisitions always qualifies as insurance, it is subject to 21% insurance premium tax. The question is that sometimes, it is not an uncertain event that is covered, but rather damages as a result of a still unknown defect, and this never been referred to the CJEU given it is not EU law.


Read a January 2019 report prepared by the KPMG member firm in the Netherlands

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