EY – A breakthrough on withholding tax refunds for Luxembourg life insurers

Article written by EY Luxembourg as part of the sponsorship of ACA Insurance Days 2023, whose content is the sole responsibility of its author.

Opportunities for life insurance companies to reclaim withholding taxes exist in diverse investment markets. An interesting possibility in an industry known for its fast-changing nature.

Recently, a Luxembourg-based life insurance company successfully reclaimed withholding taxes on income payments from Switzerland. The company relied on the provisions of the 1993 double tax treaty between Luxembourg and Switzerland. The purpose of this treaty is to eliminate the taxation of the same income in both jurisdictions. Reclaiming withholding tax – a tax levied in the source country on income payments like dividends – presents an opportunity for life insurers to get the excess tax withheld back, serving the dual purpose of increasing the return on investment.

Notably, the insurance company effectively obtained a refund of withholding tax imposed on income payments received from Swiss companies spanning the period from 2019 to 2022. After a prolonged period where obtaining any refund seemed challenging and progressing slowly, this development suggests a shift in the prevailing trend. Nevertheless, the Swiss Federal Tax Administration (SFTA) adopts a meticulous approach in addressing the accumulated refund requests. Overall, a broader trend can be observed that benefits to life insurance companies operating within multiple jurisdictions.

As the insurance world anticipates more related insights in the future, the success of this refund process suggests increasing reclaim opportunities of withholding taxes within international operations.

This positive outcome should encourage life insurers to conduct gap analyses regarding services provided by their custodian banks, to ensure that they exploit most opportunities for receiving the full amount of withholding tax refunds they are entitled to.

Withholding tax reclaim opportunities analysis, in this case, becomes an effective tool to identify potential areas of improvement within existing systems, processes, and frameworks in relation to international tax laws and bilateral agreements. By ascertaining how to bridge the gap between current processes and optimal revenue payment collection, life insurers can make informed decisions about their withholding tax processing.

The open and ongoing cases

Contributing to the discussion on the possibilities for life insurers to recover withholding tax, EY already observed in 2021 the opportunity for foreign life insurers and pension funds to claim the refund of the withholding tax on French source dividends. It also underscores the broader international potential of tax reclaims.

The path-breaking decisions of the French Supreme Administrative Court (Conseil d’Etat, 11 May 2021, n°438135, UBS Asset Management Life) and the Court of Justice of the European Union (CJEU) (College Pension Plan of British Columbia v. Finanzamt München, 13 November 2019, n°C-641/17), which both significantly impacted the dynamics of withholding tax rules on dividends for insurance companies in other EEA Member States.

The Conseil d’Etat ruled that withholding tax levied on the gross amount of dividends paid to foreign life insurers is contrary to the free movement of capital, since comparable French companies are taxed on the net amount of dividends. The relevant difference here lies in the fact that French life insurance companies book technical provisions to guarantee their legal commitments towards policyholders, reducing their tax burden significantly, while a foreign entity in a comparable situation is taxed on the gross amount of French-sourced dividends.

Following this judgment, non-resident life insurers and pension funds now have the confirmed opportunity to reclaim the withholding tax on French-source dividends.

To summarize, these highlighted cases show that reclaiming withholding tax is not only feasible, but it is also strongly recommended, given the potential benefits. It stresses the need for all international life insurers to conduct thorough gap analyses to identify the opportunities available for withholding tax reclaims.

In conclusion, while the tax laws that apply in the various countries of investment may seem like a labyrinth to many businesses, Luxembourg life insurers have recently demonstrated how a well-planned approach, relying on existing double tax treaties, can lead to significant benefits. The recent wave of withholding tax reclaims presents not only a reimbursement opportunity but also a possibility for life insurance companies to reassess their international operations and fine-tune their strategic planning.

The landscape of international taxation and double tax treaties is continually evolving. Consequently, investment in understanding these changes, and adapting to them, has proven to be instrumental for the overall profitability. Life insurers, following in these successful footsteps, stand to disentangle themselves from the complexities of international tax laws and unlock new opportunities for financial growth.

Authors

Patrice Fritsch
EY Luxembourg Partner, Tax

Guilherme Franco
EY Luxembourg Senior Manager, Tax