Case notes: Insurance Premium Tax on cross-border M&A insurance: ECJ decision on location of risk

The Court of Justice of the European Union (CJEU) has delivered its decision in A Ltd, a case concerning the location of insured risk, and therefore which jurisdiction can charge IPT, on cross-border M&A insurance policies.

A Ltd, a company headquartered in the UK, sold insurance products in Finland where it operated under a local licence but did not have a separate permanent place of business. There were three policies under consideration: two warranty and indemnity (W&I) policies, one taken out by the seller and one taken out by the buyer, and a separate policy specifically covering pre-sale tax liabilities of the target, a Finnish entity.

The Finnish tax authority ruled that IPT was chargeable on policies sold by A Ltd where the target company was Finnish despite the fact that the policy holder (whether buyer or seller) was not based in Finland. A Ltd appealed.

Finland sought clarification of whether it was entitled to levy Finnish IPT on the contracts. Finland would be entitled to levy IPT if the location of the risk under the insurance contracts was Finland.

The key question was whether the location of the target was a factor in determining where the risk was situated. Article 157 of the Solvency II Directive (Directive 2009/138/EC) sets out the familiar principle that IPT is chargeable solely in the Member State where the insured risk is situated.

The meaning of “Member State in which the risk is situated” is set out at Article 13(13) of the Directive. This provides specific rules for insurance policies covering buildings or content, registered vehicles and short-term travel or holidays. Other policies come under a general rule that the risk is situated in the Member State where the policy holder is habitually resident or, if the policy holder is a company, where the policy holder’s establishment to which the contract relates is located.

In considering its response to arguments raised by Finland that the risk was most closely associated with the target, the CJEU considered whether the target could be an establishment of the seller or buyer for the purposes of Article 13 of the Directive. In the case of Kvaerner (C-1191/99), the CJEU held that for the purpose of determining which establishment of the policyholder should be treated as most closely connected with the policy, another group company could be treated as an establishment of the company taking out the policy notwithstanding that the other company was a separate legal entity. The Kvaerner decision emphasises the importance of identifying the place where the activities are carried out that give rise to the insured risk.

The CJEU returned to the underlying question of where the insured activity of the policyholder was carried out. The CJEU held that IPT was chargeable exclusively in the Member State where the policyholder, acting as buyer or seller, was established. In reaching this conclusion, the CJEU observed that the policies insured contractual risk associated with the value of the shares and the fairness of the price paid by the buyer and not the risk of damage or financial loss associated with the ongoing operation of the target. It followed from this that the place where the insured activity was carried out was where the buyer or seller, not the target, was established.

The decision accords with established practice in the insurance sector of distinguishing between cross-border policies insuring shareholder risks and local-level risk and apportioning premiums for IPT purposes between relevant countries. It is however welcome confirmation of the position.