Insurance premium tax (IPT), is a risk factor that captives and their parents often overlook.
The tax benefits of self-insuring through offshore companies are generally lost. This means that the success of the captive industry depends on high levels of risk transfer expertise and risk management skills. Captives who are not properly prepared or informed about the EU’s IPT payment requirements can find it difficult to navigate these complicated processes.
All captives and traditional insurers that insure risks within the EU are responsible for complying with IPT tax laws of the European Union. Because IPT liability is determined by the location of risk, EU law governs IPT.
The EU’s Second Non-Life Directive identifies the Location of Risk to be the country where the insured risks are located. This allows for consistency in risk assessment, and prevents IPT from being double-taxed. Each IPT payment can only ever be collected in that country. This directive is an example of IPT where the EU has offered some uniformity.
This idea can be illustrated with an example: A captive owned by a Dutch corporate parent that insures a factory in Spain. The captive must collect IPT on the Spanish portion of the premium, and appoint a Spanish representative to represent it before the authorities. It will pay and report IPT in accordance with Spanish legislation.
When insuring risk within EU country, captives that are located in the EU (such a in Gibraltar or Malta), Europe but not outside the EU(Jersey) or any other location (including Bermuda/the Cayman Islands) will all be subject to these principles.
However, the EU does not have a uniform IPT settlement or collection system. Each country can choose how to tax insurance premiums. While 21 of the 27 EU member countries currently have IPT regimes in place, these differ in terms both of the business classes that are subject to such taxes as well as in terms of the collection process.
It is evident that EU IPT is complex. This is further emphasized by the EU’s 23 official languages and 13 currencies. Multinational corporations that operate in several EU territories and may need to move their workers and goods around the course of their business can be subject to many national tax codes and practices.
These organizations often employ captives that are managed by independent insurance companies whose expertise and know-how is focused on risk rather than tax. There is a high chance of non-compliance in these cases with IPT regulations. The reputational and financial implications that can be suffered by captives and their parents are severe. 2001 saw the European Court of Justice establish a precedent by granting national tax authorities the authority to pursue purchasers of insurance for premiums not paid by their insurers. It is clear that captives are under pressure to provide reliable and complete solutions for IPT compliance.
Many now choose to be financially and operationally efficient because they are driven by the desire for efficiency. outsource the management of IPT payments entirely. This can help keep captives’ structures slim and increase transparency in the compliance process. It also reduces the number of relationships and makes it easier to contact one person. The ‘fire and forget’ approach to IPT compliance is quickly gaining popularity. Others may choose to manage the situation themselves, overseeing a network or local fiscal representatives from different EU countries. The captive should decide which level of administrative involvement they want and confirm, for compliance purposes that the taxes have been paid and correctly calculated.
IPT is an inevitable part of managing EU risks. However, it should not have any influence on commercial decisions. Captives can be focused on their core tasks by finding the right solution to meet their needs. They can also rest assured that they will comply with tax laws.