Modernisation of the Insurance Tax Act
On 29th October 2020, the German parliament (Bundestag) approved the reformed Insurance Tax Act. This reformed Act will enter into force the day after its announcement in the Federal Law Gazette, expected in December. In some lines, therefore, the Act already applies to premiums levied in December 2020 and January 2021. For a start, there is nothing unusual about the ongoing development and adaptation of the almost 100-year-old Insurance Tax Act.
Furthermore, the purpose of the reform, i.e. to “modernise and develop insurance tax law and achieve greater legal certainty through explicit or clarifying regulations” is certainly being welcomed by all sides. Nevertheless, consumer associations, insurers and industry representatives have united in rare agreement, calling for drastic changes to the reform package – largely without success. How has this come about, and which regulations specifically have been criticised? Three areas in particular have been the subject of strong criticism, namely:
- the “clarifications” on the risk location of specific circumstances involving third countries,
- the first-time limitation of tax exemption for certain types of personal insurance, and
- the obligation to file electronic tax returns.
From the industrial policyholders’ point of view, the new regulations governing risk location are particularly problematic in relation to specific circumstances. Under the new rules, for example, insurance cover for business/operating units and other facilities located in Non-member States (countries outside the EEA) will be subject to taxation under German tax law. Since it can be assumed that the Non-member States in each case will also demand that business/operating units located on their territory be subject to taxation under their respective national law, this could lead to multiple taxation, without double taxation agreements being applicable in the area of insurance tax. The economies of scale of international insurance programmes will be reduced to such an extent as to make insurance cover needlessly more expensive.
For all customer groups, the first-time limitation of tax exemption for certain personal insurance policies is worth mentioning. Health and nursing care insurance policies and invalidity and occupational disability insurance policies taken out from 1st January 2022 will only be exempt from insurance tax if the insurance benefit is payable either to the actual “person at risk” or to a close relative of the “person at risk”. In the group insurance line, for example in foreign (travel) health insurance, whether the policy is subject to insurance tax or whether it remains tax-exempt will, in future, depend on how the policy has been worded. The obligation to file tax returns online from 1st January 2022, also provided for in the Act, poses organisational challenges to providers of personal insurance in particular who, until now, have not had to deal with questions relating to insurance tax payments. The fear is that the effort involved in setting up systems for the proper calculation and electronic registration of insurance tax will mean an extra burden for all insurance customers.
The Insurance Tax Act reform proved controversial as it made its way through parliament. Whether this Act will be a success may be a contentious issue. It can be said, however, that the self-imposed goal of ensuring greater transparency and legal certainty in the future will not be achieved through this reform.