Insurance: European Court provides guidance on taxation of capital life insurance services

A recent ECJ judgement has tackled the issue of the taxation of life insurance products. The case concerned the taxation of savings in the form of capital life assurance in Sweden and centred on the EC rules on the free movement of services, since direct taxation does not as such fall within the purview of the EC. The Court looked at Article 59 which precludes the application of any national rule which, without objective justification, impedes or makes the provision of services between Member States more difficult than the provision of services within the home Member State.

The Swedish rules establish different tax regimes for capital life insurance policies depending on whether they are taken out with companies established in Sweden or with companies established elsewhere. In particular, persons insured with companies not established in Sweden must register themselves and declare premium payments to a central body. They must also pay the tax themselves and for this purpose find the necessary funds. On the other hand, persons insured with companies established in Sweden need take no particular action since the tax is levied in this case on the company.

The ECJ found that such rules may dissuade interested persons from taking out capital life assurance with companies not established in Sweden.

Furthermore, although the surrender, after a long period, of a capital life assurance policy taken out with a company not established in Sweden is no more costly for the policyholder than the surrender of an insurance policy taken out with a company established in Sweden, the situation may be different where a policy is surrendered after a short period. The Court decided that this is another factor liable to dissuade a person from taking out such a policy.

The Court did not accept the argument of the Swedish government that the principle of equal treatment is satisfied by provisions in the Swedish legislation which allow account to be taken of the tax applicable in another Member State. This was because payment of such tax is not taken into consideration unless it amounts to at least one quarter of the tax applicable in Sweden. As a result, the taxation of savings in the form of capital life assurance taken out with companies not established in Sweden is in most cases liable to be higher than the taxation of like savings with companies established in Sweden.

The ECJ, taking all the factors into account, concluded that the legislation in question is prohibited by the EC rules on the free movement of services within the EC.