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Spain: A quest to locate risk for insurance premium tax

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Jorge Moreira Pelaez of Garrigues investigates a potential flaw in how insurance transactions are located, which could lead insurance and reinsurance taxpayers onto difficult territory.

The insurance premium tax (IPT) is an indirect tax levied on insurance transactions. In accordance with the European legislation on (re)insurance activity (Article 157 of Directive 2009/138/EC, November 25 2009, on the taking-up and pursuit of the insurance and reinsurance business (Solvency II)), the Spanish IPT law situates the taxable event – the insurance transaction – by identifying where the insured risk is deemed to be located. The location of the insured risk is itself determined pursuant to the application of the criteria provided for in Directive 2009/138 as well.

Although there are many varied types of risk that are covered by insurance transactions nowadays, the criteria for localising a risk are based exclusively on the following, pursuant to Article 13, point 13 of the Directive:

a) the member state in which the property is situated, where the insurance relates either to buildings or to buildings and their contents, in so far as the contents are covered by the same insurance policy;

b) the member state of registration, where the insurance relates to vehicles of any type;

c) the member state where the policy holder took out the policy in the case of policies of a duration of four months or less covering travel or holiday risks, whatever the class concerned;

d) in all cases not explicitly covered by points (a), (b) or (c), the member state in which either of the following is situated:

a) the habitual residence of the policy holder; or

b) if the policy holder is a legal person, that policy holder's establishment to which the contract relates.

The final criterion listed in (d) is singularly important because it encompasses the great majority of insurance transactions; every transaction that is not related to a building or its content, a vehicle or a trip.

Leaving aside policies taken by individuals, the application of this criterion to insurance transactions executed by companies turns out to be quite complex, in many cases.

In fact, the European Court of Justice (ECJ) has twice ruled on the appropriate interpretation of this rule. These rulings are the decision of June 14 2001 in case C-191/99 – Kvaerner, and more recently, the decision of January 17 2019 in C-74/18 – A Ltd.

The ECJ's jurisprudence in this regard may be summarised as follows:

1) A risk can only be situated in one place.

2) It must be construed that, like the other rules, this rule has a physical rather than legal basis for localisation. In this rule, this specifically means the physical location of the establishment, owned by the policyholder, where the activity that carries the risk which is being insured is undertaken.

Despite the apparent simplicity of these criteria, doubts may arise about the way in which they must be applied in many cases: let us think, for instance, about the risks covered by cyber-insurance.

These doubts concern not only the insurance undertakings, but also the policyholders, because the latter might be bearing an excessive chargeability of tax – for example, in respect of all those insurance transactions that cover risks in foreign affiliates – or might be facing an insufficient chargeability of tax, when the insurance provider is not established in Spain.

In summary, it will be necessary to go on a quest to locate risk in order to determine whether the tax burden under this tax and under the other parafiscal charges (as in the case of surcharges legally established in favour of the Spanish Consorcio de Compensación de Seguros) that follow the same localisation rule, is correct.

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