Corporate Insurance & Regulatory Bulletin - February 2012

Originally published 5 March 2012

Keywords: insurance, corporate, reinsurance, Finance Bill

UK – proposed changes to the taxation of insurance groups

TAXATION OF CONTROLLED FOREIGN COMPANIES

HM Treasury has recently closed a consultation on the tax regime for controlled foreign companies ("CFCs"). CFSs are non-UK tax resident companies controlled by UK companies. Under the existing rules, a UK company can be assessed to UK tax on profits realised by the CFCs in its group where those CFCs pay less than 75% of the tax on their income that they would have paid had they been resident in the UK, and the departure of several UK-headquartered insurance groups has been attributed to this rule. HM Treasury is believed to be aiming to reverse this trend with its changes to the CFC tax regime.

HM Treasury is yet to digest all the comments received on the consultation paper, so the final form of the new rules to be introduced to Parliament as part of the Finance Bill 2012 is yet to be established. Probable features of the new rules can, however, be discerned from the draft rules published on 31 January 2012, including the following provisions:

Under the new regime, it is anticipated that an exemption from the regime for CFCs based in certain countries (typically those that are not considered tax havens) will continue to apply, although it is worth noting that the exemption for CFCs based in Luxembourg will not apply to insurers. There may be an exemption when only a small proportion of the relevant CFC's trading income is derived from the UK. It is expected that the determination of whether a country is a CFC will include consideration of where the significant people functions relevant to asset ownership and risk management are located – if these are in the UK, the CFC rules will apply. This definition will catch overseas insurers using UK persons to insure non-UK risk. There are also expected to be changes to the types of income which fall to be assessed to UK tax under the CFC regime; for example, it is anticipated that property income will be excluded, as will reinsurance income unless there are no commercial reasons for the reinsurance or the CFC is outside the European Economic Area. TAXATION OF LIFE ASSURANCE BUSINESS

Changes to taxation of life assurance business are required in order to address issues arising from the advent of Solvency II, as the current tax system for life assurance businesses relies on regulatory returns which will not provide the necessary information once Solvency II comes into force.

The proposed changes in this area include the following:

All life assurance business will be taxed on the basis of accounts, rather than regulatory returns. (Currently, only permanent health insurance is taxed on an accounts basis.) The allocation of profits between businesses will no longer be prescribed by statue, instead it will become a commercial allocation. The tax regime for life assurance companies will be more aligned to the regime for other companies, for example with regard to the taxation of debt. Europe – Solvency II timing update

February has seen continued speculation about when (and even whether!) Solvency II will be implemented. Although there is nothing concrete to report, market opinion certainly seems to be that the previously anticipated implementation date for Solvency II will be pushed back.

In particular, EIOPA has written a letter to the European Commission emphasising the challenges it faces with regard to consulting on Solvency II while there are still so many uncertainties, and stressing the importance of the next legislative steps occurring in a timely manner. The letter also stated that "it is difficult in light of the global crisis to defend any further delay in its implementation" and that further delays might encourage individual countries to pursue their own solutions.

Concern has also been expressed by the new head of the German supervisory authority that the anticipated timetable cannot now be met in light of the delay to the vote in the Economic and Monetary Affairs Committee which was announced in January.

In addition, the European Actuarial Consultative Group said in its February report that the rumours of delay were consistent with reports of continuing controversy in the European Parliament on topics including "discount rates and the reflection of asset illiquidity".

We will be monitoring this area closely.

Europe – European Commission letter to EIOPA regarding third country equivalence

On 2 February 2012, the European Commission (the "Commission") wrote a letter to the European Insurance and Occupational Pensions Authority ("EIOPA") regarding third country equivalence assessments under Solvency II.

Whilst not prejudging the outcome of the ongoing negotiations in the Council of Ministers and the European Parliament in relation to Omnibus II, the Commission understands that these bodies are supportive of a transitional regime for third country equivalence, and are, therefore, moving forward in this regard.

The Commission has been engaging in dialogue about a potential transitional regime for third country equivalence under Solvency II with the supervisory authorities of a number of third countries. As a result of this, the Commission has asked EIOPA to carry out a technical analysis (as opposed to a full equivalence assessment) of the following in relation to a number of countries:

whether persons working for, or on behalf of, the supervisory authorities are bound by obligations of professional secrecy equivalent to those under Solvency I; and the areas where the third country's supervisory regime does not currently meet the equivalence criteria ("Gap Analysis"). The countries involved, and the status of the Commission's discussions with them, is as follows:

Australia, Chile, Hong Kong, Israel, Mexico, Singapore and South Africa have expressed an interest in being part of a transitional regime. Discussions with these countries are ongoing and decisions about their potential inclusion in a transitional regime will not be taken by the Commission until 2013. Initial discussions have been had with Brazil, China and Turkey. Whilst discussions are at an early stage, these countries are also, in principle, interested in inclusion in a transitional regime. The Commission and EIOPA recently met with representatives from the Federal Insurance Office and state insurance regulators from the United States. As the prudential regulation of insurance undertakings is a state competence under US law, a different approach for equivalence in relation to the US will be required. The Japanese Financial Services Agency (the "JFSA") has indicated its interest in being included in a transitional regime in relation to group solvency and group supervision. Therefore, the Commission has asked EIOPA to initiate further discussions with the JFSA in order to carry out a Gap Analysis in these areas. Europe – EIOPA publishes action plan for colleges of supervisors

EIOPA has published a 2012 action plan for colleges of supervisors, which is dated 16 January 2012 (the "Action Plan").

The Action Plan details actions which colleges are required to implement during 2012, and sets deadlines for the completion of these actions. The action points are split between action points for colleges which have not been constituted until now/ have not fulfilled the work plan for 2011, and action points for all colleges. Key targets from the Action Plan include:

Preparing for the implementation of Solvency II – the particular focus here is the pre-application process for internal model approval (an ongoing task); Agreeing a work plan for when to take actions and decisions in 2012, in particular in relation to Solvency II (to be completed by 30 June 2012); Enhancing of the regular exchange of information in colleges (to be complied with from 30 June 2012 and ongoing); and (A task for the group supervisor) making a gap analysis (by the end of 2012). Alongside the Action Plan, EIOPA also published a report (dated 2...