Reform of the German Insurance Tax Act: what policyholders can expect in 2021

A reform of the German Insurance Tax Act in 2021 may result in multinational companies facing double taxation on risks outside the European Economic Area (third countries). The draft legislation has been met with criticism, as the changes are tantamount to a premium increase for policyholders with business premises in third countries. We examine the changes to the Act and how financial interest cover (FINC) can be used to protect commercial interests.

The German Federal Government is planning a reform of the German Insurance Tax Act; the corresponding draft legislation was passed by the Bundestag on 29 October 2020. ‘The Act was promulgated in the Federal Law Gazette on 09.12.2020 and is thus legally binding,’ explains Nadine Benkel, Assistant to the Management Board at Funk. 

Taxation for risks in third countries

The potential of double taxation for risks outside the European Economic Area (EEA) is one of the major changes. According to the Act, insured third-country business premises (‘permanent establishments’) and risks of policyholders based in Germany will, in future, be liable for German insurance tax. A further component of the reform is that (German) insurance tax will be payable for the first time in third countries in which there is no insurance tax.

‘Pursuant to the draft legislation, our clients will have to pay 19% insurance tax in Germany on top of local taxes in respect of DIC/DIL master agreements (difference-in-conditions/difference-in-limits insurance). This is tantamount to a premium increase,’ explains Nadine Benkel, summarising the changes. DIC/DIL master agreements offer protection in the form of difference-in-conditions and difference-in-limits coverage for risks at foreign subsidiaries that are not sufficiently covered by the relevant local policy.

Following the completion of Brexit, the United Kingdom (UK) may also be classed as a third country from 2021, depending on whether an agreement is reached. 

Taxation for risks in third countries

The potential of double taxation for risks outside the European Economic Area (EEA) is one of the major changes. According to the Act, insured third-country business premises (‘permanent establishments’) and risks of policyholders based in Germany will, in future, be liable for German insurance tax. A further component of the reform is that (German) insurance tax will be payable for the first time in third countries in which there is no insurance tax.

‘Pursuant to the draft legislation, our clients will have to pay 19% insurance tax in Germany on top of local taxes in respect of DIC/DIL master agreements (difference-in-conditions/difference-in-limits insurance). This is tantamount to a premium increase,’ explains Nadine Benkel, summarising the changes. DIC/DIL master agreements offer protection in the form of difference-in-conditions and difference-in-limits coverage for risks at foreign subsidiaries that are not sufficiently covered by the relevant local policy.

Following the completion of Brexit, the United Kingdom (UK) may also be classed as a third country from 2021, depending on whether an agreement is reached. 

Status quo in terms of the taxation of international insurance programmes

Up to now, location abroad within the context of DIC/DIL master agreements justified a 0% German insurance tax rate on the insurance premium. This practice was based on the fact that insurers are usually obliged to declare and pay German insurance tax. In respect of third countries, the policyholder is responsible for paying the local insurance tax – a duty that remains unchanged by the reform of the legislation.



Definition of a ‘permanent establishment’ pursuant to Sect. 12 of the German Fiscal Code

The Act refers specifically to ‘permanent establishments’ Pursuant to Sect. 12 of the German Fiscal Code, a permanent establishment is ‘any fixed place of business or facility serving the business of an enterprise.’

‘Permanent establishments’ include:

  • The place of business management
  • Branches
  • Offices, factories or workshops 
  • Warehouses
  • Building sites, constructions or installation projects if they last for longer than six months

 

Financial interest cover as an alternative solution?

The planned legal reform raises the question of how companies can protect themselves against the possibility of double taxation. Here, the option of financial interest cover comes to the fore. Unlike a DIC/DIL master agreement, the financial interest cover model only serves to insure the parent company for its own interest(s). As with a traditional international insurance programme, FINC insurance also requires a local policy in the foreign country concerned. In this instance, the master agreement is concluded between the insurer and the parent company. The subsidiaries located abroad cannot be covered under the agreement and therefore do not have the status of insured entities. As such, the financial interest of the parent company in the value retention of the foreign subsidiary is insured – and the insurance premium is taxed at an insurance tax rate of 19%. No tax liability applies in the third country.

Different countries have different legal frameworks and different compliance requirements. As a consequence, some countries require the use of a local insurer, making them non-admitted countries (e.g. China or Brazil). With just a handful of exceptions, the central question of which countries constitute non-admitted markets cannot necessarily be answered unequivocally, with the status sometimes needing to be determined on a case-by-case basis (e.g. Hong Kong, Singapore and Vietnam). In order to ensure a high level of security and compliance, Funk has long recommended taking out financial interest cover for the aforementioned countries. We will be happy to advise you on the pros and cons.

Definition of a ‘permanent establishment’ pursuant to Sect. 12 of the German Fiscal Code

The Act refers specifically to ‘permanent establishments’ Pursuant to Sect. 12 of the German Fiscal Code, a permanent establishment is ‘any fixed place of business or facility serving the business of an enterprise.’

‘Permanent establishments’ include:

  • The place of business management
  • Branches
  • Offices, factories or workshops 
  • Warehouses
  • Building sites, constructions or installation projects if they last for longer than six months

 

Financial interest cover as an alternative solution?

The planned legal reform raises the question of how companies can protect themselves against the possibility of double taxation. Here, the option of financial interest cover comes to the fore. Unlike a DIC/DIL master agreement, the financial interest cover model only serves to insure the parent company for its own interest(s). As with a traditional international insurance programme, FINC insurance also requires a local policy in the foreign country concerned. In this instance, the master agreement is concluded between the insurer and the parent company. The subsidiaries located abroad cannot be covered under the agreement and therefore do not have the status of insured entities. As such, the financial interest of the parent company in the value retention of the foreign subsidiary is insured – and the insurance premium is taxed at an insurance tax rate of 19%. No tax liability applies in the third country.

Different countries have different legal frameworks and different compliance requirements. As a consequence, some countries require the use of a local insurer, making them non-admitted countries (e.g. China or Brazil). With just a handful of exceptions, the central question of which countries constitute non-admitted markets cannot necessarily be answered unequivocally, with the status sometimes needing to be determined on a case-by-case basis (e.g. Hong Kong, Singapore and Vietnam). In order to ensure a high level of security and compliance, Funk has long recommended taking out financial interest cover for the aforementioned countries. We will be happy to advise you on the pros and cons.

‘We are keeping track of developments and will provide our clients with full details regarding double taxation. We are also in close contact with insurers, meaning that we can respond quickly and offer comprehensive advice where necessary.’

Nadine Benkel, Assistant to the Management Board

Draft legislation met with criticism

Insurers and German business representatives have criticised the draft legislation, warning of colossal red tape for insurers and double taxation for policyholders. ‘We are critical of the modernisation of the Insurance Tax Act, especially given the already challenging situation on the industrial insurance markets,’ says Nadine Benkel.

Insurers are currently in the process of identifying the relevant contracts and adjusting their billing systems. As a partner you can rely on, Funk is closely monitoring the situation.

 

03/12/2020

Your pont of contact

Nadine Benkel
+49 40 35914-0
E-Mail-Contact
Andreas Strauss Ansprechpartner bei Funk
Andreas Strauß
+49 40 35914-0
E-Mail-Contact