We only use a strictly necessary and functional cookie used by the website to function properly and to display the website’s contents in the language of your choice.

In the jungle of insurance taxes

Written by

Posted on

An overview of taxes, levies and other charges for policyholders in CEE countries.

The possibility of companies not receiving payment for their products sold or services performed always exists. Poor payment discipline, insolvency procedures, political risks, risks and prevention measures we faced in relation to COVID-19 pandemic are the ones which can jeopardize company’s financial security. In most jurisdictions around the world insurance premiums are subject to indirect taxation, such as VAT, Goods and Services Tax or a specific tax, such as insurance premium tax (IPT), stamp duty or other levies. Over the past few years and in line with a global trend of governments’ positions to take profit from bigger market turnovers, a growing number of countries have introduced or increased insurance premium tax and parafiscal charges.

In most of Eastern Europe, but definitely within the European Union member countries, insurance services are generally exempt from VAT, and most EU Member States have introduced a tax or levy on insurance premiums. The variety of taxes on insurance premiums can be a burden for insurers writing global multi-jurisdictional programmes, as they need to understand which taxes apply in countries where risks are located. Insurers often need to administer and pay taxes in those countries, and historically there has not always been a high level of compliance when it comes to “foreign” insurance taxes. Non-compliance is still an issue, and application of local taxes should be agreed with the insurer considering the size of each risk.

  • One of the major issues for the correct calculation of taxes in international programmes and for the tax payment in the state where the tax is due, lies in the principle applied by individual tax legislation. Most of these tax laws stipulate that the insurance tax is due in the country where the (property) risk is located, the company activity is deployed or where vehicles are registered (principle of risk location).
  • Some countries, like Germany, add to this basic principle the stipulation that the tax is due in their country, if the policyholder is a national citizen or company (principle of policyholder). The obvious conflict between the two principles may be solved by superseding EU regulation or by a double-taxation agreement. Each case must be examined individually.
  • The third principle that applies at least in EU countries is that insurance of international transports and credit risks is exempted from taxation. There are other special rules for the insurance of diplomats or travel insurances, but this would lead to far in this general survey.

With these considerations in mind, brokers are becoming more concerned about their obligation of correct advice giving in respect of foreign insurance taxes. Although in most cases the insurer will transfer the tax amount to the respective tax office abroad, the policyholder remains liable for the correct tax payment and is held directly responsible by the state that does not receive the tax in accordance with their legislation. It is the duty of the broker to check at least the correct tax calculation by the insurer.

Insurance Premium Taxes in Eastern Europe

In Eastern Europe, IPT is still in its early stages and the amounts collected remain relatively low, when compared to Western European standards. Among the territories that joined the EU in 2004, multiple countries have not yet introduced a Western European IPT regime. This is the case in Estonia, Latvia and Lithuania but also in the Czech Republic. Bulgaria is an example of low insurance premium taxation. Slovenia and Slovakia, in turn, have IPT rates closer to those applied in Western Europe and with a limited number of exemptions.

Hungary has introduced a so called IPT regime, but in fact it is based on an insurance levy to be paid directly by the insurer in accordance with the size and structure of his portfolio, following a sliding scale model. This means that the insurer must not put insurance tax on his premium invoice. Of course, he is allowed to consider the levy among his costs in the premium calculation.

The same levy principle applies in Romania or Poland, where insurers have to pay direct contributions to the state for various reasons but are not allowed to charge the policyholders directly. They will be hidden, however, in the overall premium calculation.

Looking at the non-EU countries in Eastern Europe, almost no IPT regimes can be observed. Serbia imposes a 5% insurance tax payable by the insured on all non-lifelines except health, accident and credit. In Ukraine, a levy calculated on gross written premiums (GWP) has to be paid by locally admitted insurers and reinsurers (excluding any inward reinsurance acceptances and without deduction of outward reinsurance remittances) and other contributions to funds have to be paid by insurers for almost all non-life lines.

In Georgia, Armenia and Azerbaijan multiple levies on all non-life classes including inward reinsurance apply. In Azerbaijan the supervisory levy is collected on all classes of insurance.

In view of the various terms used for describing insurance taxes, levies, contributions, stamp duties etc., we recommend differentiating between:

  • Insurance taxes = always paid separately by the policyholder and shown clearly in the premium invoice
  • Additional taxes = also paid by the policyholder, apply to some lines of business only; e.g. fire brigade tax for policies insuring fire risks, motor insurance tax in connection with Motor TPL insurance
  • Levies and similar contributions to the state or to funds (also called parafiscal charges) = paid by the insurer and being part of his overall expenses

Increasing international discussions

While taxation, including insurance taxation, remains a largely sovereign matter, a number of prominent tax issues are increasingly being discussed at international or EU level. In recent years, for instance, policymakers have been seeking ways to ensure that companies pay their fair share of tax and avoid profit shifting to reduce their tax bills. Due to the cross-border nature of tax evasion and avoidance, this effort requires international cooperation. This development also touches the area of insurance premium tax and levies.

There are discussions on EU level to have insurance taxes replaced by ordinary VAT. This would mean that indirect insurance taxation becomes common use throughout the Union and associated partners, but the implementation will still take some time, as it is not considered to be a major issue to be solved.

Ensuring Compliance for GrECo clients

Giving advice on correct insurance taxation to clients is an integrated part of our service delivery. All GrECo employees have access to information material in this respect from international sources, selected local information and internal news. Under its compliance policy, the GrECo Group is continuously monitoring all developments in taxation in GrECo markets and offers evaluation of complex insurance taxation cases where a more thorough study of legal texts and practice is needed.

The article is written by Andreas Krebs.

Paul Spittau

Head of Group Carrier Relations & Insurance Mediation

T +43 664 537 17 42

Related Insights

View All