(C.A.A. Paris dated February 2, 1995, nø 94-160, Min. du Budget c/ Societe Generale: cmtel 4917, with the conclusions of the "Commissaire du Gouvernement" Micheline Martel)
The stability reserve created by mutual agreement between the subscribers to a group insurance and the insurer, especially in order to avoid premium increases during the period of execution of the agreement, represents an accrued receivable for the subscriber who is therefore taxable on it.
The group insurance contracts are subscribed by companies in order to induce certain people to adhere to the agreement: the most important group insurance contracts are retirement insurance for employees and life and disability insurance of the borrower.
The economy of these insurances, which are meant to cover a numerous population for a long period of time, might (in the absence of specific provisions) significantly fluctuate due to changes in the frequency and the number of damages. In order to stabilise the income of the insurers and not to induce them to increase the premiums, the agreements systematically provide for the constitution of provisions of stability (referred to as stability reserves).
Until the Conseil d'Etat decree nø 95-153 dated February 7, 1995 (JO du 14, p. 2485), these provisions were not regulated; they were only regulated by the agreement itself negotiated between the insurer and the subscriber.
These agreements generally provide that each year a count is to be made by the insurer: he first deducts a percentage (agreed upon the parties) from the whole of the premiums collected during the accounting period in order to cover his operating expenses, then the cost (borne or booked as a provision) of the damages, less (in some cases) the exceeding provisions booked during the previous accounting periods.
The positive balance (if any) is then submitted to a dividing up: one part (often inferior to 10%) is definitively allocated to the insurer; the remainder is "allocated" to the subscriber but assigned to the making up of the stability reserve on which the possible negative balances will afterwards be charged. Finally, the agreements provide for the distribution to the subscriber of the possible exceeding part of the stability reserve in proportion to a ceiling considered as sufficient to secure the survival of the agreement (often fixed to more than one year of premiums).
It was obviously never challenged that the payment of the exceeding stability reserve to the subscriber made up a taxable income for the latter.
However, the Tax Authorities have for a long time been concerned to tax the sums booked as stability reserves waiting to be used to fill the losses (or repayment to the subscriber when the amount of the losses exceeds the contractual ceiling).
However, in a state of uncertainty, the Tax Authorities had taxed insurance companies (considered as owners of the insurance premiums, but having only booked possible contingency provisions computed on a standard statistical basis) as well as banks (considered as having at their disposal an accrued receivable certain enough in its principle and its amount on the remainder of the yearly computation above-mentioned).
The administrative court of Paris, in a judgment dated June 29, 1993, censored this analysis. The Tax Authorities considered it its duty to appeal, but at the same time the insurance companies worried about the risk they had to be taxable on the provisions they had booked in their accounts, took in charge to issue a legal text applicable to these provisions.
By chance, five days later, the Court of Appeal, on February 2, considered that the stability reserves booked in the accounts of insurers, represented a debt of the latter vis-a-vis the banks (consequently the banks had to be taxed on this accrued receivable), whereas on February 7, a decree of the Conseil d'Etat obliged the insurers to book provisions meant to face the fluctuations of the number of damages linked to the group insurance operations against the life and physical injury risks.
The incompatibility is obvious: if banks are to be taxed on these reserves, they consequently bear the fluctuation risk linked to the number of the damages and they, not the insurers, should be the ones to book the provisions that the decree in fact forces the insurers to book.
It is to be expected that the Tax Authorities will quickly find a solution to solve this unpleasant muddle, without waiting for the Conseil d'Etat to solve it in two years due to the long time required to examine an appeal.
If it can be understood that the Tax Authorities have an eye on the fact that the taxation of income arising from an insurance group should not be delayed by the setting up of a level too highly linked to the ceiling of repayment of the exceeding stability reserves, it is however a shame that the banks themselves have to support the obligation to ensure the stability of the group insurance agreements, without being able to book provisions for such purposes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. For additional information contact Claire Acard on 33/(1)/55 61 10 10 or Lionel Benant on 33/220.127.116.11. The members of Archibald Andersen Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar and the Lyon Bar.