Luxembourg: Insurance Premium Tax

On February 21, 2013, the Court of Justice of the European Union ("CJEU") ruled that article 50 of Directive 2002/83/EC concerning life assurance is to be interpreted as meaning that a Member State's right to subject to an indirect insurance tax on life insurance premiums paid by the individual policyholder residing in this Member State overrides the Member State's taxing rights where the contract was concluded.

The facts and questions at issue

The issue at stake was the interpretation of article 50 of Directive 2002/83/EC (the "Directive") which provides that insurance contracts shall be subject exclusively to the indirect taxes on insurance premiums in the Member State of the commitment. The "Member State of commitment" is defined by the Directive as the Member State in which the policyholder has his/her habitual residence.

In the case at hand a Dutch insurance company with no presence in Belgium had contracted a life insurance contract with several persons residing in the Netherlands at the time of the entering into the agreement. Those persons however subsequently moved their residence to Belgium. The question therefore became as to whether the Netherlands retained their taxing right on the insurance premium since the policy holders lived there initially ("static interpretation of article 50"), or whether that right vested with Belgium as of the day of the change of residency ("dynamic interpretation of article 50").

The ruling by the CJEU in favour of the dynamic interpretation

The CJEU rules in favour of a "dynamic" interpretation of article 50 of the Directive on life insurance. Indeed, the CJEU felt that the objectives of the Directive would be better achieved if article 50 was interpreted in a "dynamic" way. The CJEU based its decision on the purpose of article 50 which is to allocate the taxing powers on insurance premiums between Member States. As the indirect tax is due when premiums are paid, and not at the moment the insurance contract is concluded, the CJEU considered that the criterion of habitual residence should be assessed at the moment these payments occur. This also achieved tax neutrality in the Member State of residence of the policy holders, since all life insurance policies offered in that Member State would be subject to the same tax rules, irrespective of the Member State where the insurance company is established.

Practical consequences

Life insurance companies will have to monitor the place of residence of their policyholders and monitor indirect taxes rules on insurance premiums across all Member States in order to fulfil their obligations, even if they do not provide any services in any other Member States.

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