On 17 January 2019, the European Court of Justice (“ECJ”) gave its judgment on the question of the right Member State entitled to levy tax on insurance premiums, which was referred to the ECJ by the Supreme Administrative Court of Finland. According to the judgment, when an insurance company established in a Member State offers insurance covering the contractual risks associated with the value of the shares and the fairness of the purchase price paid by the buyer in the acquisition of an undertaking, an insurance contract concluded in that context is subject exclusively to the indirect taxes payable on insurance premiums in the Member State where the policyholder is established. The SAC will give its final ruling on the matter based on the judgment, which is expected within approximately 2 months.
On 4 November 2016, the Central Tax Board (“CTB”) of Finland gave a preliminary ruling (2016/49), in which it assessed the liability to pay the insurance premium tax (“IPT”) at 24% in relation to a buy-side Warranty & Indemnity (“W&I”) insurance. According to the ruling, which was given in respect of a buy-side W&I policy issued in respect of a Finnish target, IPT at 24% should be levied on the premium payable by the insured. According to the CTB, the location of the place of business of the target company was relevant, as the policyholder is a legal person and the insurance policy covers risks caused by the operations of the target company. In that case the state of location of the target company was also the state of location of the risk.
The CTB’s preliminary ruling is not binding as it was appealed to the SAC. The question to be resolved by the SAC was how to interpret the provisions regarding the state in which the risk is located of the Directive 2009/138/EC (Solvency II, recast). The SAC decided to postpone the processing of the case and requested a preliminary ruling from the ECJ, which was given on 17 January 2019.
ECJ Judgment of the ECJ (C-74/18)
According to the ECJ judgment, when an insurance company established in a Member State offers insurance covering the contractual risks associated with the value of the shares and the fairness of the purchase price paid by the buyer in the acquisition of an undertaking, an insurance contract concluded in that context is subject exclusively to the indirect taxes on insurance premiums in the Member State where the policyholder is established. According to the ECJ, it should be primarily considered that the place where the activity is carried out whose risk is covered by a W&I policy, is the place of establishment of the policyholder acting either as the seller or as the buyer, and not the place of establishment of the target company.
Further updates and information
HPP will update clients on the outcome of the SAC process as is becomes available (expected in spring 2019).
The ECJ ruling is contrary to the ruling given by the CTB. Due to the judgment by the ECJ, we expect the Finnish Tax Administration to amend its current guidelines on the tax on insurance premiums after the matter has been further evaluated in the Finnish Tax Administration. For now, the ECJ judgement should be followed by insurers in respect of W&I policies issued in relation to Finnish target.
HPP has a market-leading team advising underwriters looking at underwriting Finnish M&A deals and tax risks and HPP’s experts would be happy to assist on all legal issues in Finland related to insurance and specifically W&I and specific tax insurance.
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Senior Advisor / Head of Tax
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