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What is happening with the tax treatment of foreign insurance undertakings?

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Public information contained in the official register of the Spanish insurance supervisor states that there are 77 insurance and reinsurance undertakings (referred to as insurers henceforth) operating in Spain under the EU freedom of establishment regime.

Most – if not all – of these foreign insurers are subject to non-resident income tax under the regime for permanent establishments in Spain. Under that regime, without prejudice to what is established in the applicable tax treaty, they must pay corporate income tax on all of the income obtained through their permanent establishments (PEs) in Spain.

Until recently, the tax position of foreign insurers’ PEs went unchallenged, and tax managers, mostly working from head offices, didn’t give a second thought to ‘checking the box’ of their compliance duties with the support of local tax compliance services providers.

However, that peace of mind has gone since the Spanish tax agency – in particular, the Madrid branch, where most PEs are tax domiciled – started an ‘audit campaign’ in relation to those PEs a couple of years ago, unexpectedly resulting in big headaches for tax managers.

It is known that the most relevant expense items on an insurer’s income statement are claims, technical provisions and (ceded) reinsurance premiums. As such, the Spanish tax agency is questioning the deductibility of all of those items.

The deductibility of large claims is now being challenged mostly on the basis of their allegedly incorrect and even unfair attribution to the PE. Using different arguments, the tax inspectors are saying that these claims do not pertain to the PE for tax purposes.

The deductibility of reinsurance premiums (usually paid to another group unit) is being rejected on the grounds that the relevant reinsurance agreements do not make sense from an entrepreneurial perspective (quota share agreements) or do not provide effective protection to the PE on standalone basis (XL agreements). Therefore, they must be disregarded for tax purposes regardless of whether these transactions have been priced at arm’s length.

Lastly, technical reserves and, in particular, claims provisions (i.e. outstanding and IBNR) are being considered excessive for tax purposes or even disproportionate or without technical justification at the level of the PE. In this case, tax inspectors are basing the assessments on a more than questionable interpretation and application of the Spanish tax provisions that deal with the tax treatment of technical provisions for corporate income tax purposes.

More specifically, when claims provisions are calculated by the insurer using its own statistical methods – and not the method provided as a safe harbour by Spanish regulatory provisions – inspectors are denying the deductibility of the provision on the ground that they are not reliable for tax purposes and consequently they are not a valid basis for calculating the tax debt. Alternatively, tax inspectors are using a residual methodology provided for in the regulatory legislation for those situations in which the insurer has not got enough information to accurately determine the amount of the reserve.

It is pretty difficult to predict how and when these controversies will end because, although there are strong arguments to oppose the tax agency’s multimillion euro assessments, the litigation route could go on for years. This is because the wording of the law, i.e. the regulatory provisions dealing with the methods for calculating the reserves, is vague and gives leeway to different interpretations, and the Spanish courts, in particular the Supreme Court, have typically adopted very restrictive positions on this issue.

With this in mind, it is advisable to review a PE’s tax position in view of the criteria adopted by the tax authorities and eventually evaluate whether it would be convenient to request a ruling from the Spanish Directorate-General of Taxes. However, it is necessary to take into consideration that the binding effects of this type of rulings only apply from the ruling date onwards and in the absence of contradictory case law or changes in the law.

Let’s see what the future brings.


Jorge Moreira

Jorge Moreira (

Garrigues, Taxand Spain

Tel: +34 915145200


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