German IPT Law Changes and Double Taxation Implications

Insurance Tax Act reforms in Germany, effective from 10 December 2020, continue to cause uncertainty in the insurance market.

The main area of concern relates to the location of risk for Insurance Premium Tax (IPT) purposes. The reform can impact a policy taken out with either an EEA or non-EEA insurer where the policyholder is established in Germany, i.e. a German enterprise, permanent establishment, or corresponding institution, or an individual habitually resident in Germany, where the policy covers non-EEA risks.

These changes affect all classes of business and are irrespective of the physical location of any insured risk.

Double taxation with policies written by EEA insurers

If a policy for the German policyholder includes non-EEA countries, then German IPT is due not only on the premium allocated to Germany, but also to premiums allocated to the non-EEA countries as well. This could be in addition to any applicable premium taxes due in the non-EEA countries.

Therefore, double taxation is a possibility. However, if the policy includes other EEA countries, then German IPT cannot be charged on premiums allocated in these EEA countries.

Double taxation with policies written by non-EEA insurers

If a policy for the German policyholder includes both other EEA and non-EEA countries, then German IPT is due not only on the premium allocated to Germany, but also to 100% of the premiums allocated to all the other countries as well. This could be in addition to any applicable premium taxes due in all these countries. Therefore, again, double taxation is a possibility.

What is a ‘permanent establishment’ or ‘corresponding institution’ for German IPT purposes?

The law reforms did not clarify what is deemed to be a ‘permanent establishment’ or ‘corresponding institution’ that would bring a non-EEA risk to be within the scope of German IPT.

Guidance from the Federal Ministry of Finance (BMF) published on 4 March 2021 did confirm that a non-EEA branch of a German policyholder would be deemed to create a permanent establishment. But it was silent on whether the same applied for a non-EEA subsidiary.

Several scenarios were also included in this guidance to aid insurers and brokers with taxing policies correctly, but unfortunately there wasn’t one for this subsidiary scenario. The BMF issued a new version of their general leaflet on insurance tax and fire protection tax for EU/EEA insurers on 20 July 2021. This included a flowchart showing the changes in taxability of policies as a result of IPT law reforms, but the non-EEA subsidiary question is not specifically answered here.

The German Insurance Association (GDV) issued a Frequently Asked Questions (FAQs) document dated 28 April 2021 to help insurers understand the reforms in several areas, which included answering some questions around the treatment of non-EEA subsidiaries.

Whilst the answers appear to provide hope that these subsidiaries do not constitute a permanent establishment, there is a caveat at the beginning of the FAQs document: it says it is non-binding, and that every insurer can interpret and apply the statutory provisions (and the associated BMF letter from 4 March 2021) at their own discretion.

This means that if insurers don’t tax non-EEA subsidiaries based solely on this guidance, they could be left open to tax assessments later, where German IPT has not been charged. The FAQs document will continue to be updated, so it will be interesting to see if there is further clarity on this point in the future.

Ongoing uncertainty around double taxation

With this ongoing uncertainty, we understand that insurers have approached the tax authorities to obtain clarity. Responses indicate that non-EEA subsidiaries are not within the scope of the reforms, so double taxation should not occur.

Any such direct confirmation from the tax authorities on this matter will protect these insurers from future assessments. It also offers the possibility for IPT refunds to be claimed where it was charged on policies that should not have been taxed in the first place.

However, until this matter is publicly clarified, which includes further communication from the BMF, the likely position is that insurers and brokers will continue to use the current, prudent approach and charge German IPT in this scenario. This means that double taxation of policies will still occur.