Swedish insurer taxation: A sector under scrutiny
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Swedish insurer taxation: A sector under scrutiny

Kristofer Brodin of KPMG Sweden explores the insurance and tax regulatory environment, outlining why those in the wider financial services sector need to keep track of potential incoming tax changes.

In Sweden, companies in the financial services sector are generally taxed as ordinary corporations under the Income Tax Act (ITA), but there are, nevertheless, limited special rules and regimes that apply to the sector. The main exceptions for the financial services sector concern the insurance industry, which has special rules for life as well as non-life insurance. This article aims at providing a general overview of the Swedish tax regime for insurance companies of both kinds. The article is only intended as an introduction to the Swedish taxation of ongoing insurance business. Issues when commencing or winding-down insurance business are not discussed.

Corporate income tax

First, a distinction should be made between the taxation of life insurance business and non-life insurance business (general/property and casualty insurance). While the former generally is subject to notional yield taxation, the latter is subject to ordinary income taxation – with certain exceptions.

Life insurance

For corporate income tax purposes, income attributable to assets and liabilities managed on behalf of policyholders and premiums should not be recognised under the ITA if the policy is a life insurance policy under the Insurance Business Act (försäkringsrörelselagen) (IBA). Certain exceptions exist, however, for group-life policies, for example.

Any cost related to income attributable to assets and liabilities managed on behalf of policyholders and premiums is non-deductible under the ITA. For policies qualifying as life insurance for this purpose, the insurer is instead taxed on a notional yield under the Yield Tax Act (lag om avkastningsskatt på pensionsmedel m.m.) (YTA).

The yield tax is calculated on the basis of assets managed on behalf of the relevant policyholders at year entry less certain financial liabilities (the capital base). The YTA provides different valuation methods for different types of assets. For life policies other than pension policies, premiums received during the year are also included in the tax base (50% of premiums received in the second half of the year).

The capital base multiplied by the Swedish 'government borrowing rate' (the average interest rate on government bonds with a remaining maturity of at least five years) equals the taxable notional yield and thus the tax base. Notably, the government borrowing rate as well as the tax rate to be applied differ between policies considered pension policies for tax purposes and other life policies. A tax rate of 15% applies to pension policies. For other life policies, such as unit-linked endowment policies, the applicable tax rate is 30%.

Non-life insurance

For non-life insurance, most items of income and expenditure follow the ITA's general corporate income tax rules. This means that the timing for recognition of income and expenditure normally follows Swedish generally accepted accounting principles (GAAP).

With the exception of shares in subsidiaries and associated companies and office properties mainly used for the insurance business, investment assets are treated as stock (current assets) for tax purposes. Investment assets considered financial instruments for tax purposes may be valued at either market value or total acquisition cost on a collective basis and other investment assets may be valued at the lowest of net sales price and cost on an item-per-item basis for tax purposes.

Insurers offering non-life insurance are allowed special deductions, including deduction for provisions to technical reserves for own account and contingency reserves. The term 'technical reserves for own account' in the ITA refers to technical reserves under the Annual Accounts for Insurers Act (lag om årsredovisning i försäkringsföretag) less the value of reinsurers' responsibility. The contingency reserve is discussed in more detail below as this may be considered a distinctive feature of Swedish insurance and tax regulation.

Moreover, deduction is granted for bonuses paid to policyholders (återbäring), premiums and fees repaid and contributions to parties supporting undertakings to prevent damages within the area of risks insured.

The contingency reserve

Under the ITA's definition, the 'contingency reserve' (säkerhetsreserv) is a reserve for arbitrary, random or otherwise imponderable losses in the insurance operations to the extent the reserve does not exceed what is necessary for satisfactory consolidation. The purpose of the contingency reserve is that a Swedish insurer should have sufficient capital for its business operations. The guiding principle of the Swedish Financial Supervisory Authority's (SFSA) regulations on allocation to the contingency reserve is that a Swedish insurer should be able to sustain heavy losses in two consecutive years.

The contingency reserve is recognised as an untaxed reserve in the balance sheet of the insurer. Allocations to and from the reserve are recognised in the income statement under Swedish GAAP. The maximum allocation to the contingency reserve is governed by regulations issued by the SFSA.

The standard calculation of the maximum allocation to the contingency reserve allowed at year-end is based on formulas specific to each class of insurance business. For instance, the formula for commercial property and casualty insurance is 50% of retained premiums plus 20% of the claims reserve for own account. As an alternative, the insurer or reinsurer may make a contingency reserve allocation that equals either three times the highest retained individual risk or a hundred times the 'price base amount' (prisbasbeloppet – the price base amount for 2015 is SEK 44,500 ($5,500), so the limit equals SEK 4,450,000, around $537,000).

For insurers allowed to exchange tax deductible group contributions (koncernbidrag, the Swedish method for tax consolidation), the sum of the group members' contingency reserves may not exceed the sum of contingency reserves if calculated individually per insurer. The group's total contingency reserve capacity may thus be allocated freely between group members taxable in Sweden.

Insurers with mixed business

If a life insurer offers non-life insurance policies, the same tax rules generally apply for that part of the business as for non-life insurance companies. Nevertheless, as for contingency reserves, it should be stressed that life insurers are not allowed to make allocations under the SFSA's regulations as it is explicitly stated that these apply to non-life insurers. Additionally, any item of income or expenditure shared between businesses subject to corporate income tax and business subject to yield tax should be allocated in a reasonable way. Precedents from the Supreme Administrative Court on the issue of what can be regarded as 'reasonable' in this context exist.

Indirect taxes

As in all EU member states, the supply of insurance policies is exempt from VAT in Sweden. This entails a restriction on insurers' right to recover input VAT on goods and services purchased from third parties. Notably, services provided to customers outside the EU, however, give right to input VAT recovery. Sweden currently has VAT grouping rules, which is why intra-group supplies may be made outside of the scope of VAT.

Sweden only applies insurance premium tax (IPT) to certain group life policies and to motor vehicle insurance, which renders IPT, generally, a limited issue in Sweden.

Recently proposed changes

Contingency reserve for non-life insurers

On June 12 2014, the Swedish Committee on Corporate Taxation published its Swedish Government Official Report – 'Neutral corporate taxation'. The amendments proposed include the introduction of a taxable notional interest income computed on the year entry balance of non-life insurers' contingency reserves. In the committee's view, the contingency reserve is seemingly comparable to the general tax equalisation reserve (periodiseringsfond), which already is subject to a taxable notional interest income supposed to compensate for the 'tax credit' received by postponing corporate income taxation. This proposal was severely criticised by the sector as the purpose of the contingency reserve is not to provide tax equalisation but to ensure sufficient consolidation among insurers.

On April 28 2015, the government proposed new tax rules on when a release of the contingency reserve is mandatory. The new rules are intended to apply in situations not covered by the SFSA's regulations and may generally be considered a codification of what already applies but is not yet expressed in law. In its proposal, the Swedish government again underlines the similarities between the contingency reserve and the general tax equalisation reserve. The main difference in this proposal, however, is that the government included a wording on the purpose of the contingency reserve showing that it has taken some notice of the feedback received on the official report from June 2014.

Taxation of life insurers

A government committee tasked with reviewing tax issues relating to occupational pensions is due to publish its official report on June 30 2015. The committee's terms of reference include reviewing whether the existing dividing line that applies to life insurance business' items of income and expenditure subject to corporate tax vis-à-vis yield tax is appropriate. If not considered appropriate, the committee should suggest amendments to the regime. The extent to which changes might be deemed necessary by the committee is impossible to predict. It is, however, clear that the issue is very complex and will need in-depth analysis.

Financial services sector tax

On May 8 2015, the Swedish government published terms of reference for an inquiry chairperson on financial services sector taxation. The inquiry chairperson is tasked with presenting a proposal for a financial services sector tax which mitigates the sector's supposed tax advantage. The proposal should be presented no later than November 1 2016.

Under the terms of reference, the inquiry chairperson is tasked with quantifying the size of any tax advantage for the sector due to financial services being VAT exempt. Based on that quantification, the inquiry chairperson should suggest a financial services sector tax which mitigates the tax advantage identified. The terms of reference do not stipulate the exact design of the tax and the inquiry chairperson may, for instance, seek some guidance from the Danish lønsumsafgift, a payroll-based financial activity tax (FAT). Nevertheless, the terms of reference do require that the tax be easy to apply and impossible to circumvent. When designing the tax, the inquiry chairperson should consider the potential impact on Sweden from a financial transaction tax (FTT), implemented on an EU level.

It should be stressed that the Moderate Party (Moderaterna), the largest opposition party, recently expressed that it is in favour of a financial services sector tax, pointing at a payroll-based FAT as an one option. This indicates some degree of consensus across the political blocks and might entail an increased probability of a financial services sector-specific tax actually being introduced.

VAT grouping

As mentioned above, the Swedish financial services sector currently has access to VAT grouping rules. Parties in opposition to the government have, however, proposed that these rules be abolished. Sweden was recently also subject to EU court proceedings initiated by the European Commission, which claimed the Swedish implementation of VAT groups to be in conflict with EU law. The EU court however held that the Commission failed to show convincingly that, in the light of the need to combat tax evasion and avoidance, the questioned restrictions in the Swedish rules were not well founded. The EU court's ruling was thus to Sweden's benefit. The government, which is in minority, reportedly wants to keep the VAT grouping rules in place. But given the political situation the basis for the rules being kept in force might not be rock-solid, so it is advisable for any stakeholder to closely monitor the situation.

Tax burden likely to increase

As follows from the above, the Swedish tax landscape is being scrutinised by different domestic committees that may suggest amendments which increase or otherwise alter the taxation of the insurance sector. In my view, it is highly likely that we will see changes which may increase the tax burden for the sector in the near future. In addition to these initiatives there are several external factors which may also impact the taxation of insurers, in particular the European Solvency II requirements as well as the upcoming changes to accounting standards (IFRS 4) and the Institutions for Occupational Retirement Provision (IORP II) draft directive. Bearing this in mind, foreign insurers and insurance groups conducting business in Sweden through branches or subsidiaries have every reason to pay close attention to the Swedish development throughout the next few years.



Kristofer Brodin

KPMGTel: +46 8 723 61 84kristofer.brodin@kpmg.se


Kristofer Brodin is a senior tax manager in the KPMG financial services (FS) tax practice and is based in Stockholm, Sweden. He specialises in Swedish and international corporate taxation. He also advises on taxes and duties specific to the financial sector such as the FTT, FAT, IPT and the Swedish bank levy (stabilitetsavgift). Brodin is responsible for banking in the FS tax practice in Sweden.

Brodin has experience in a vast variety of tax issues arising within the financial services industry, including issues specific to banking, non-life and life insurance. He advises domestic and international clients on restructurings, mergers & acquisitions, cross-border investments, outsourcing projects, asset finance, structured finance transactions etc.

Before joining KPMG, Brodin served as head of corporate income tax and products with one of the major Nordic banking groups.

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