Technical Tax Masterclass: Location of Risk Rules Ing. Ladislav Hanak Senior Client Manager – European Tax Practice, FiscalReps Steve Norman Senior Client Technician – European Tax Practice, FiscalReps

Agenda Quiz Sources for identification of the Location of Risk (LoR) EU Directives European Court of Justice (ECJ) Cases Location of Risk (LoR) vs. Location of Policyholder (LoP) Grey Areas Local Implementation of LoR rules Exercises Q&A

Quiz 1.How many member states are there in the European Union (EU)? a)27 b)28 2.How many EU member states apply IPT/parafiscal charges to FoS insurance premiums? a)Less than 15 b)More than Which group of countries does not apply IPT? a)UK, DE, HU b)SK, CZ, PL

Quiz 4. Who pays the premium tax in Germany? a)Insurance company b)Policyholder 5. Who bears the cost of the premium tax in Hungary? a)Insurance company b)Policyholder 6.Which European country does not follow location of risk rules? a)France b)Switzerland

Quiz A few quick statistics about the European Union: 28 member countries 24 official languages 13 currencies (Euro + 12 others) Approximately 94 premium taxes and parafiscal charges

Sources for identification of the LoR EU Directives European Court of Justice National Legislation

EU Directives Second Non-Life Insurance Directive 88/357/EEC of 22nd June 1988 Third Non-Life Insurance Directive 92/49/EEC of 18th June 1992

Second Non-Life Insurance Directive Second Non-Life Insurance Directive 88/357/EEC of 22 nd June 1988 Article 2 (d) Member State where the risk is situated means: a)The Member State in which the property is situated, b)The Member State of registration, where the insurance relates to vehicles of any type, c)The Member State where the policy-holder took out the policy in the case of policies of a duration of four months or less covering travel or holiday risks, d)In all cases not explicitly covered by (a) (b) or (c) 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 Article 2 (d) Member State where the risk is situated means: a)The Member State in which the property is situated, b)The Member State of registration, where the insurance relates to vehicles of any type, c)The Member State where the policy-holder took out the policy in the case of policies of a duration of four months or less covering travel or holiday risks, d)In all cases not explicitly covered by (a) (b) or (c) 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

Second Non-Life Insurance Directive Second Non-Life Insurance Directive 88/357/EEC of 22nd June 1988 For example, a policy where a ship registered in the UK, policyholder is located in Switzerland and ship Operates between Germany and UK Question: What is the location of risk? For example, a policy where a ship registered in the UK, policyholder is located in Switzerland and ship Operates between Germany and UK Question: What is the location of risk?

Third Non-Life Insurance Directive Third Non-Life Insurance Directive 92/49/EEC of 18th June 1992 Article 46 “In derogation from the first indent of Article 2 (d) of Directive 88/357/EEC, and for the purposes of this paragraph, moveable property contained in a building situated within the territory of a Member State, except for goods in commercial transit, shall be a risk situated in that Member State, even if the building and its contents are not covered by the same insurance policy.’’ Article 46 “In derogation from the first indent of Article 2 (d) of Directive 88/357/EEC, and for the purposes of this paragraph, moveable property contained in a building situated within the territory of a Member State, except for goods in commercial transit, shall be a risk situated in that Member State, even if the building and its contents are not covered by the same insurance policy.’’

Third Non-Life Insurance Directive Third Non-Life Insurance Directive 92/49/EEC of 18th June 1992 Article 46 “Without prejudice to any subsequent harmonization, every insurance contract shall be subject exclusively to the indirect taxes and parafiscal charges on insurance premiums in the Member State in which the risk is situated…” Article 46 “Without prejudice to any subsequent harmonization, every insurance contract shall be subject exclusively to the indirect taxes and parafiscal charges on insurance premiums in the Member State in which the risk is situated…”

ECJ Cases – Kvaerner Case The ECJ Ruled on 3 questions: 1.Can a tax authority of an EU country levy a legal entity established in another EU country for premium taxes due on a business establishment within its boundaries where the premium was paid to an insurer based in the EU? ECJ Ruling: Yes 2.Does it matter if the policyholder is not the overall parent company, but some other company in the group? ECJ Ruling: No 3.Does it matter if the cost of the insurance premium is not passed on (wholly or in part) to the subsidiary company? ECJ Ruling: No. The method of payment or invoicing is irrelevant. Even if no intragroup charge exists the tax authority can still impose a premium tax levy. The case concerned a policy purchased by Kvaerner (UK resident company), covering its global operations. Included was a Dutch subsidiary company. The contract stated that the insured could be Kvaerner itself and any subsidiaries. Kvaerner indirectly invoiced the subsidiary’s share. Upon discovery of the policy the Dutch tax authority billed Kvaerner for the subsidiary’s share of the premium. The resulting case was referred to the ECJ.

ECJ Cases – RVS Levensverzekeringen RVS Levensverzekeringen NV v Belgium in 2013 Implications for life assurers and composites who write FoS life assurance policies Case concerned policyholders who took out policy when habitually resident in NL, then relocated to BE. NL does not subject life assurance policies to indirect taxes, BE imposes a 1.1% premium tax ECJ determined that the Member State of commitment should be considered as the habitual residence of the policyholder at the moment of each premium payment, rather than the Member State of commitment being fixed by the habitual residence of the policy holder when the contract was originally entered This decision has implications for life insurers in terms of pricing and costs, and therefore profit margins Monitoring indirect taxes in each member states and associated local rules for determined when habitual resident is or is not deemed to exist Registering for settlement of premium taxes

LoR vs. LoP Switzerland o Location of the policyholder o Swiss policyholder and Swiss insurer o Swiss policyholder and non-Swiss insurer o Swiss insured and Swiss/non-Swiss insurer Liechtenstein o If Swiss stamp duty does not apply, then Liechtenstein stamp duty could apply o Tax liability lies with the insurance company

Grey Areas Concise Oxford English Dictionary: “A thing used for transporting people or goods on land e.g. car, truck or cart” Industry practice: Generally taken to includes ships, as well as aircraft and land vehicles “A means of transportation” (e.g. DK, GR, SI) Includes motor vehicles, ships, yachts and aircraft (e.g. UK) Not defined (e.g. DE) EU Commission: Land vehicles only Oil rigs – not means of transportation/vehicle? Must check each country’s IPT rules e.g. in UK, offshore oil and gas installations designed to be moved from place to pace are regarded as ships (!) LoR rule 2: “relates to vehicles of any kind”

Grey Areas Observations Little/no guidance from tax authorities Conflicting view from EU Commission No EU case law LoR rule 2: “relates to vehicles of any kind”

Grey Areas Some degree of permanence “Establishment” may include: o Head office o Branches o Parent company o Subsidiary o Representative offices o Offices of a ‘tied’ agency (economically and legally dependent) o Selling agents o Factories o Oil and gas wells o Construction site LoR rule 4: “the policyholder’s establishment to which the contract relates…”

Grey Areas French overseas departments and territories account for 4.1% of the population of the French republic Split into DROMs (overseas departments and regions) and COMs (overseas collectives) DROMs (location of risk considered to be France, filed under French IPT Return): o French Guyana (IPT rate applicable divided by 2) o Guadeloupe o Martinique o Mayotte (IPT rate applicable divided by 2 until 31/12/2018) o Reunion

Grey Areas COMs (location of risks not considered as France, own tax regime and return): o French Polynesia o Wallis et Futuna o Saint-Martin o Saint-Barthélémy o Saint-Pierre-et-Miquelon o New Caledonia (could be considered a COM, but has extended autonomy compared to other COMs and has a different legal status.) In practise Wallis et Futuna and Saint Martin are too small to have implemented their own tax regime, and several references are made to them in the French Insurance Code, so it may be possible to include them on the French IPT return.

Local Implementation of LoR Rules “The tax liability exists when insuring the following risks’’: 1.For risks related to immovables, in particular structures and facilities, and related to their contents except for goods in commercial transit if the precondition is that the objects are located within the territory of application of this Act; 2.For risks related to vehicles of every type, which are to be registered or are registered in an official or officially recognised register in the territory of application of this Act, and which have a registration plate; 3.For risks associated with travel or holidays on the basis of an insurance relationship with a term of not more than four months if the policyholder performs the legal acts needed to bring this insurance relationship into existence in the territory of application of this Act. 4.If the insurance covers risks or objects other than those specified in the first sentence above, the tax liability exists if the policyholder: Is a natural person and, at the time when he pays the insurance premium, he has his residence or habitual abode within the territory of application of this Act, or Is not a natural person and, at the time when he pays the insurance premium, the enterprise’s registered office, the permanent establishment or the corresponding institution to which the insurance applies is located within the territory of application of this Act. “The tax liability exists when insuring the following risks’’: 1.For risks related to immovables, in particular structures and facilities, and related to their contents except for goods in commercial transit if the precondition is that the objects are located within the territory of application of this Act; 2.For risks related to vehicles of every type, which are to be registered or are registered in an official or officially recognised register in the territory of application of this Act, and which have a registration plate; 3.For risks associated with travel or holidays on the basis of an insurance relationship with a term of not more than four months if the policyholder performs the legal acts needed to bring this insurance relationship into existence in the territory of application of this Act. 4.If the insurance covers risks or objects other than those specified in the first sentence above, the tax liability exists if the policyholder: Is a natural person and, at the time when he pays the insurance premium, he has his residence or habitual abode within the territory of application of this Act, or Is not a natural person and, at the time when he pays the insurance premium, the enterprise’s registered office, the permanent establishment or the corresponding institution to which the insurance applies is located within the territory of application of this Act. Germany (unofficial translation/summary) Section 1(2), Insurance Tax Act

Local Implementation of LoR Rules “Duty… shall only be chargeable on policies relating to risks referred to in the definition of the term ‘risk’ situated in Malta’’…which means and includes : (b) In the case where the insurance relates to vehicles of any type, any risk related to any vehicles registered in Malta… (d) In the case where the insurance relates to any risk… other than a risk specified in the foregoing… if the policyholder has his habitual residence in Malta or, where the policyholder is a legal person if the establishment, to which the contract relates, is situated in Malta” Note: "vehicle" has the same meaning as is assigned to motor vehicle by article 2 of the Motor Vehicle Insurance (Third Party Risks) Ordinance “Duty… shall only be chargeable on policies relating to risks referred to in the definition of the term ‘risk’ situated in Malta’’…which means and includes : (b) In the case where the insurance relates to vehicles of any type, any risk related to any vehicles registered in Malta… (d) In the case where the insurance relates to any risk… other than a risk specified in the foregoing… if the policyholder has his habitual residence in Malta or, where the policyholder is a legal person if the establishment, to which the contract relates, is situated in Malta” Note: "vehicle" has the same meaning as is assigned to motor vehicle by article 2 of the Motor Vehicle Insurance (Third Party Risks) Ordinance Malta Section 27, Duty on Documents & Transfers Act 1993, as amended and Article 2(1) Insurance Business Act 1998, as amended

Local Implementation of LoR Rules “A risk is located in the UK if the insurance’’: (b) Relates to any vehicle of any type which is registered in the UK ('vehicle' includes motor vehicles, ships, yachts and aircraft); (d) Is of a type not covered in (a) to (c) above and the policy holder is either: an individual habitually residing (see paragraph 5.2.6) in the UK at the date when the contract is entered into; or a business, and the establishment (see paragraph 5.2.5) to which the policy relates is in the UK” “A risk is located in the UK if the insurance’’: (b) Relates to any vehicle of any type which is registered in the UK ('vehicle' includes motor vehicles, ships, yachts and aircraft); (d) Is of a type not covered in (a) to (c) above and the policy holder is either: an individual habitually residing (see paragraph 5.2.6) in the UK at the date when the contract is entered into; or a business, and the establishment (see paragraph 5.2.5) to which the policy relates is in the UK” United Kingdom Section 27, Duty on Documents & Transfers Act 1993, as amended and Article 2(1) Insurance Business Act 1998, as amended

Exercises Exercise 1 A container ship registered in Germany, is insured for Marine Hull (EU Class 6). The ship’s owner is a UK based company. Is the insurance premium subject to: a)German IPT? a)UK IPT? Exercise 1:

Exercises Exercise 1 Mr X, whose principal place of residence is in the UK, purchases a holiday chalet in the French Alps, and takes out an insurance policy to insure the chalet and contents. 1.What is the class of insurance? a)Class 9 Other Damage to Property b)Class 13 General Liability 2. Which country has jurisdiction to apply tax on the insurance premium? a)UK b)FR Exercise 2:

Exercises Exercise 1 Mr and Mrs Y, who are habitually resident in Ireland, belatedly purchase travel insurance during their holiday in Germany. It is taken out with UK based insurer. The policy covers their German holiday and travel plans for the next 12 months. Which country has jurisdiction to apply tax on the insurance premium? a)IE b)DE Exercise 3:

Exercises Exercise 1 A haulage company based in Belgium pays a premium to cover the loss/damage to goods that it is transporting to a customer located in the Netherlands. What is the location of risk? a)BE b)NL Exercise 4:

Exercises Exercise 1 A parent company established in France pays a premium to cover damage to its subsidiary’s premises situated in the City of London. The subsidiary carries out business activities in Germany and Spain What is the location of risk? a)DE b)ES Exercise 5:

Questions