New Insurance Tax Act in Germany

FINC as a Solution to Avoid Double Taxation in Non-EEA-Countries?

The modernization of the Insurance Tax Act passed by German federal parliament in 2020 led to criticism from many German insurance brokers operating internationally. One of the reasons for this is the decision that master program cover for German policyholders with insured subsidiaries in non-EEA countries will henceforth not only be subject to taxation in the respective countries, but will also be subject to additional taxation in Germany. As a result, companies with headquarters in Germany are threatened with double taxation if local policies in non-EEA countries remain part of insurance programs.

Many German brokers are now asking how to avoid double taxations and what alternative solutions are available. One option that is currently frequently addressed in this context is the Financial Interest Clause (FINC). The strategy of insuring the financial interest of the parent company – instead of the local subsidiary – in the event of a loss is tempting at first glance: For multinational groups, this may appear to be more convenient and cost-efficient, as only the parent company is insured and no additional local policies with individual premiums, fees and taxes are required.

Installing FINC coverage for entities abroad is possible regardless of the local insurance & compliance laws. However, the efficiency of FINC is limited, as it usually does not consider local specifics. Without a local placement, there is a potential risk of policy terms, limits and conditions are not being compliant with local laws and regulations.

In the event of a claim, claim settlement from abroad via master policy is not straightforward. Two serious issues can arise: The necessary management of a claim proves to be particularly difficult if either the insurer is not licensed in the respective country or the applicable FINC is considered to be inadmissible, so claims management is hampered by local authorities. Addressing this problem through local fronting may provide some relief, but carries additional risks from potential differences between local fronting insurance terms and master terms. Ultimately, claims handling initiated from abroad is always 2^nd choice. Even with a local fronting partner being involved, the quality of claims management is often below the level of service provided by a local broker.

Ideally, the experienced loss to the financial interest of the parent company is equivalent to the theoretical loss if the locally operating entity would be insured. However, some FINC wordings do not necessarily take into account all operational, strategic and economic losses in order to evaluate the total loss to the financial interest. Thus, there is the potential threat that the indemnity sum might be lower than the actual loss.

In some cases it might be quite challenging how to forward the received compensation by the parent company to the local entity. Many countries reject direct compensation payments through any FINC cover or have an unclear position, which in case of doubt must first be determined in court. Many foreign tax authorities view standalone FINC coverage as a direct evasion of a local tax liability. This creates the risk of sanctions against the forwarding of any indemnity payments or the forwarded indemnity payment might be classified as income and thus be subjected to an income tax. As a result, the policy holder faces additional costs and difficulties not known at the time FINC coverage has been placed. As a result, the parent company may feel misadvised by the broker.

Our global broker alliance has consistently advocated that premium portions of master coverages for both EEA and non-EEA countries should be collected through local policies. Placement of local policies offers several advantages:

1. Local placements are more transparent and are compliant with local laws: They limit most uncertainties.

2. A local insurance broker professionally manages the client’s insurance interests and handles the claims settlement locally.

3. Local placements are often more cost-effective in the event of a claim compared to FINC.

4. Local placements allow greater control on total insured values, perils and include local particularities and special risks.

Of course, FINC coverages also have a raison d’être when the loss risk & frequency of the foreign operation is low or the operations abroad have a highly subordinate relevance to the parent company. In many cases, local placements to avoid double taxation are the better and safer option and ensure professional management of your client’s insurance interests abroad.

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