22/02/2019

Court of Justice Preliminary Ruling on Finnish Insurance Premium Tax

It is common for the parties in mergers and acquisitions to consider insuring the risk relating to the sale and purchase agreement. This risk most often relates to the value of the shares being purchased and the fairness of the purchase price. This kind of insurance can be taken out by either the purchaser or the seller, and the purpose of such a policy is that the insurer will cover financial damage caused by breaches of the terms and conditions of the sale and purchase agreement as provided for in the terms of the policy.

It is quite common for the purchaser, seller and target company in a transaction to be established in different countries. Many countries, including Finland, collect a tax on the premiums of such transaction insurance policies. The amount of this tax varies from country to country, so the parties naturally have an interest in what country’s tax regulations apply. Is it based on where the target company is established or where the purchaser or seller are established?

The Supreme Administrative Court of Finland is currently hearing an appeal on a preliminary ruling of the Central Tax Board concerning a warranty & indemnity insurance policy offered by a UK insurer on the Finnish market. The insurer operates under a cross-border licence and has no fixed establishment in Finland. The insurer applied for a preliminary ruling from the Central Tax Board to determine which country is entitled to levy the insurance premium tax in the circumstances presented in the application.

The Supreme Administrative Court sent the following preliminary ruling questions to the Court of Justice:

  1. In the interpretation of Article 157(1), first subparagraph of Directive 2009/138/EEC, (1) read in conjunction with Article 13(13) and (14) thereof, is the Member State entitled to levy tax on insurance premiums considered as being the State in which the company (a legal person) which has taken out the insurance policy is established or the State in which the company which is the subject of the company acquisition is established, where an insurance company with its registered office in Great Britain, which does not have a place of business in Finland offers insurance covering risks relating to a company acquisition
    — to a company which does not have a place of business in Finland, which, in the company acquisition, acts as the purchaser, and the target company is established in Finland;
    — a company established in Finland which, in the company acquisition, acts as the buyer, where the target company of that acquisition is not established in Finland;
    — a company which has no place of business in Finland which, in the company acquisition, acts as the seller where the target company of that acquisition is established in Finland;
    — a company established in Finland, which in the company acquisition acts as the seller where the target company of that acquisition is not established in Finland.
  2. Does the fact that the insurance covers only the tax liabilities of the company which arose before the company acquisition have any impact in the present case?
  3. Does the question whether the company acquisition concerns shares or a part of the business of the target company have an impact in the present case?
  4. If the company acquisition concerns the shares of the target company is representations made by the seller to the buyer concern only the fact that the seller is the owner of the shares sold and that they are not subject to third-party claims have any effect in the present case?

The Court of Justice issued its preliminary ruling on 17 January 2019 (case C-74/18) in which it stated the following:

The first subparagraph of Article 157(1) of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), as amended by Directive 2013/58/EU of the European Parliament and of the Council of 11 December 2013, read in conjunction with Article 13(13) of Directive 2009/138, must be interpreted as meaning that, when an insurance company established in a Member State offers insurance covering the contractual risks associated with the value of the shares and the fairness of the purchase price paid by the buyer in the acquisition of an undertaking, an insurance contract concluded in that context is subject exclusively to the indirect taxes and parafiscal charges on insurance premiums in the Member State where the policyholder is established. (emphasis added)

The Supreme Administrative Court will issue its ruling in the appeal shortly. Based on the Court of Justice’s preliminary ruling, it seems quite clear that the Member State where the policyholder is established is decisive when determining what premium tax regulations are applied. The Member State where the insured party or the target company are established does not seem to have any impact. This Court of Justice preliminary ruling provides a foundation for international groups of companies to plan their taxation.