Whatever you do, don’t panic

Swiss Re appears to have shot the reinsurance industry in the foot by picking a fight with German tax authorities.

The case, about whether VAT was liable on a portfolio transfer, went all the way to the European Court of Justice in Luxembourg and ended on 22 October with judges upholding the lower court’s decision. Swiss Re, they said, could not recoup the money it paid the Munich tax office in 2002 on the transfer of 195 life reinsurance contracts from its German subsidiary.

Few reinsurers will have taken any pleasure in the ruling, as the fear is that it could now apply to reinsurance contracts in every EU?member state.

While Swiss Re believes no new liabilities arise from the decision, other reinsurers are worried. The court decision spread quickly among delegates at the annual reinsurance gathering at Baden-Baden and was greeted with startled expressions.

No one quite knows what the repercussions will be. Reinsurance executives, who until now have had their noses firmly lodged in books about Solvency II, have spent the last few weeks making feverish calls to their tax experts and lawyers to discover what the ruling could mean to them, their balance sheets and their bonuses.

While the German tax office involved in the case, Finanzamt München für Körperschaften, has every right to gloat, there has been an eerie silence from other tax bodies across the Continent. There is so much silence, in fact, that reinsurers might actually think it wise to remain silent themselves, rather than stir a hornets’ nest.

But let’s be realistic, we are talking about money. If anyone, not least government authorities, believes they can get their hands on more of the stuff, they will make every effort to do so. We can safely assume tax offices from London to Ljubljana are studiously eyeing reinsurance tax returns at this very moment to find financial gain for their political masters. Silence, therefore, could be something to worry about.

However, Swiss Re, which has had longest to weigh up the case, believes the industry as a whole should not panic. The firm says that many portfolio transfers may qualify for country-specific VAT exemptions under ‘transfer of going concern’ rules.

And we can be reassured that case law has already established the meaning of the expression ‘insurance transaction’, namely that the insurer undertakes, in return for the payment of a premium, to provide the insured with the service agreed under the contract agreed between the parties. This point remains unchanged, Swiss Re says, meaning that routine insurance and reinsurance transactions are not affected by this ruling. “We do not believe that the ECJ’s decision fundamentally threatens the basis of reinsurance business as a whole. Some of the commentary in recent days appears therefore somewhat alarmist,” a Swiss Re spokesman says.

But as TMF VAT & IPT Services managing director Richard Asquith poiints out, the case still poses questions about redomiciliations in the last few years. “I think the companies that are worrying the most are those that are moving portfolios: companies with interests in Europe moving portfolios between Europe, Bermuda and Switzerland. They will be the ones trawling through documents to see if they are exposed. The portfolios might be millions or billions, and any tax on that would be a huge chunk.”

Will the authorities dredge up outstanding tax on transfers from years ago? Retrospective cases are unusual, Asquith says, but they can happen. “Tax authorities are capable of anything, especially at the moment because tax officials are all looking for revenues.”

david.banks@globalreinsurance.com

Key points

• The ECJ has ruled that Swiss Re cannot recoup the VAT it paid on 195 life reinsurance contracts transferred from its German subsidiary
• With tax authorities more keen than ever to capture revenue, insurers are concerned what the judgment will mean for future tax bills
• Routine insurance and reinsurance transactions are not believed to be affected by the ruling, but the case still poses questions for redomiciled companies moving portfolios