EU and local legislation
Location of risk is one of the key criteria an insurer must identify and consider before thinking about insurance premium taxes. It’s important to understand the location of risk rules and apply them correctly to be able to settle insurance premium taxes compliantly and to the correct tax authority. Whilst location of risk rules can be complex, the rules set out in the EU Solvency II directive make it more straightforward for insurers to assign the location of risk on certain insurance risks such as stationary property or loss of profits.
It is less straightforward to apply the location of risk rules to other insurance risks such as long-term health cover of individuals who may relocate to another country, or marine hull coverage of a fleet of vessels operating across multiple territories. These are prime examples of some of the more complex issues and challenges in EU insurance premium tax compliance, where the relevant local premium tax legislation must be carefully scrutinised and interpreted in order to be confident of compliance.
Classifying easier risk types
Identifying the location of risk within the EU can range from clear cut to very challenging depending on the type of risk covered. Building insurance, for example, should follow the first rule detailed in article 13 (13) of the Solvency II directive, which quite simply states that the risk is situated where the building is situated. This rule also extends to buildings contents insurance, even where the building and its contents are not covered by the same policy. The only exception to this rule is in relation to commercial goods in transit coverage.
As we know, insurance premium tax is not harmonised and there can be grey areas when talking about certain types of insurance. Insurance of vehicles could be one of the problem areas due to the varied definitions of “vehicles of any kind” within local legislation. Industry practice usually includes land vehicles, aircraft and ships as types of vehicles, however, there are some instances where not just types of transport may be classed as vehicles. Interestingly, in the UK, offshore oil and gas installations which are designed to be moved from place to place should be regarded for location of risk purposes as ships.
Marine policies where ships travel across multiple EU territories can make it difficult for insurers to determine the location of risk. Problems arise when considering marine insurance in the territory of Malta. Maltese legislation specifically defines a “vehicle” as a motor vehicle as such in accordance with Maltese law. The interpretation of this Maltese legislation in respect of marine policies can therefore be debated as ships are not explicitly covered by the definition of a “vehicle”.
In addition, the insurance of ships should not follow a ship’s registration in Malta or the Maltese flag as more commonly considered across other EU jurisdictions. By that reasoning, the location of risk on marine insurance could be interpreted as in Malta if the policyholder is situated in Malta, even if the ship is not registered to Malta. This could create potential double taxation issues for a Maltese policyholder who has insured a vessel that is registered in Great Britain for example.
Understanding location of risk rules is crucial. To avoid potential double, or incorrect, taxation insurers must carefully analyse their insurance contracts and apply correct location of risk rules for the jurisdictions where they write insurance.