New Administrative Guidance on German Insurance Premium Taxes

Multinational groups often take out international insurance policies to provide group-wide cover against their worldwide risk exposure. Normally, a master policy is taken out by the parent, supplemented by local policies for the local subsidiaries. These companies should therefore be aware of an amendment to the German Insurance Tax Act (VersStG) passed on December 10, 2020.

Under the amended regulations, taxability in Germany now exists in principle if an insurance relationship relates to a permanent establishment or other facility of persons other than individuals located outside the EEA (i.e. EU, Norway and Liechtenstein) pursuant to Sec. 1(2) sentence 2 no. 4 VersStG. The prerequisite for this is that the policyholder has its registered office in Germany, presenting the risk of double taxation: German insurance tax plus the corresponding tax in the country where the permanent establishment or other facility is located. In contrast, the regulations remained unchanged with regard to taxability in Germany if an insurance relationship with a non-EU/EEA insurer directly or indirectly relates to a company, a permanent establishment or another facility located in Germany pursuant to Sec. 1(3) no. 3 VersStG.

On these topics, Germany’s Federal Ministry of Finance (BMF) recently published new administrative guidance (circular of 4 March 2021, III C 4 - S 6400/21/10001 :001) outlining how both the changes and the unchanged regulations will work in practice.

Case study of foreign-headquartered multinational

A US parent forms a multinational business group together with its international affiliates. The US parent has taken out a master policy from a US insurer that also provides local insurance coverage to the group’s affiliates, including two German subsidiaries.

A portion of the insurance premiums paid by the US parent has been allocated to one German subsidiary (as chargebacks), while the other German subsidiary does not pay any insurance premiums.

German insurance premium tax burden?

Under the new administrative guidance on German insurance premium taxes (IPT), the German tax authorities consider a portion of the insurance premiums paid by the US parent to the US insurer to be subject to German IPT pursuant to Sec. 1(3) no. 3 VersStG. However, the tax liability applies not to the entire insurance premium, but only to the portion paid by the US parent to cover the German subsidiary’s risks. For the tax liability as such, the German tax authorities have taken the view that it is irrelevant whether the German subsidiary has actually borne a portion of the insurance premium (by means of chargebacks).

Nonetheless, it is not clear whether the German tax authorities will take the same position if the US parent has taken out a master policy that fills the coverage gaps of local policies of German subsidiaries. This is the case particularly where the likelihood of ever needing to use the master policy is somewhat remote. One example might be master policies with difference-in-condition (DIC) or difference-in-limits (DIL) coverage above local policies, where the DIC or DIL ensures that the master policy applies only to very major losses.

Tax liability

In the case study above, the master policy was taken out from a non-EU or EEA insurer and provides insurance coverage for the German subsidiaries. As the policyholder, the US parent is therefore liable to pay the German IPT in the view taken by the German tax authorities. This should apply regardless of the US parent’s country of residence for tax purposes. Moreover, a co-insured German subsidiary might also be liable to pay German IPT. This, however, should require the German subsidiary to have borne or paid the relevant portion of the German IPT.

Overarching implications for global businesses

The amendments to the Insurance Tax Act make it important for international companies and groups to be aware of the connecting factors for insurance tax liability, especially if they want to ensure a uniform level of coverage according to German standards, via a DIC or DIL, for all business units.

International double taxation of insurance premiums can arise, since taxation outside the EU or EEA is not likely to cease as a result of the amended German legislation. In the absence of applicability of the EU Directive to these situations, there should be no infringement of EU law in this respect. As it stands, however, it has yet to be defined conclusively which insurance policies are covered in detail by the new regulation.