Tax Alert: Case C-74/18 – ECJ Ruling on Location of Risk of M&A Insurance

On 17 January 2019, the European Court of Justice delivered its judgment in Case C-74/18, concerning the location of risk rules for insurance premium tax purposes.

The case concerns insurance written by the UK insurer, referred to as ‘An Ltd’, which operates in Finland on a freedom of services basis, without a separate permanent place of business in Finland.

The Finnish Supreme Administrative Court had referred four questions to the Court of Justice for a preliminary ruling. The questions focussed on the location of risk of insurance products covering company acquisitions. The insurance products in question were ‘warranty and indemnity insurance’ taken out by either the seller or the buyer, and ‘tax liability insurance’ related to the liability connected with the tax situation of the undertaking transferred. The purpose of those products is to cover the policyholder or to compensate him for financial loss.

In the case referred, the taxpayer argued that the State in which the risk is situated should be determined on the basis of the Member State in which the policyholder is established, and not where the target acquisition company is.

Conversely, the Finnish Authorities, citing the judgment in the Kvaerner ruling, argued that the place where that risk is situated must be determined on the basis of a connection and, in its view, the place of establishment of the target acquisition company is a specific connecting factor determining the place where the risk is situated.

The court found in favour of the taxpayer and highlighted the application of Article 157(1) in conjunction with Article 13(13)(d)(ii) of EU Directive 2009/138 (Solvency II). Article 157(1) prescribes that each Member State has the right to tax insurance premiums related to risks located in that Member State. Article 13(13) of that directive, outlines EU location of risk rules.

The ECJ identified that the protection objectives of the insurance contract should be considered and the types of contract identified in the case are intended to exclusively protect the policyholder. Contracts concluded in that manner must, therefore, be ”subject exclusively to the indirect taxes and parafiscal charges on insurance premiums in the Member State where the policyholder is established”.

You can find more information and see ECJ judgment from 17 January 2019 under the following link.

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