reinsurance activities in Luxembourg November 2014
Table of contents I. Luxembourg overview... 3 II. What is reinsurance?... 3 III. Why Luxembourg?... 4 A. General legal framework on reinsurance... 4 B. Tax factors... 7 Conclusion... 9
I. Luxembourg overview The Grand Duchy of Luxembourg is situated at the heart of Europe, between Belgium, France and Germany. It covers a small area of 2,586 km² and has a population of about 550,000 inhabitants. The country s international character is underlined by its varied thousand year history and currently by the fact that foreigners, the majority of whom originate from other European Union Member States, represent approximately 40% of the total population. As a result, the majority of the Luxembourg population is fluent in Luxembourgish, French, German and English. Luxembourg is a constitutional monarchy headed by a Grand Duke. A democratically elected government and an efficient administration offer not only exceptional economic, political, social and tax stability but also an excellent legal framework. The Luxembourg government has supported the development of a banking center since the 1960s enabling Luxembourg to become a major banking center in only a few decades. The per capita GDP has grown into one of the highest in the world. More recently, significant growth in the investment funds sector has contributed to the consolidation of the traditional banking sector. The 1980s also saw the launch of reinsurance activity in Luxembourg. The local legislation governing reinsurance, initially introduced in 1984, was amended and expanded in the light of experience by the law of 6 December 1991 on the insurance and reinsurance sector, as amended (hereinafter: the "Law of 1991"). Numerous Grand-Ducal regulations and circulars issued by the supervisory authority complete the legal framework. In accordance with European legislation, both the insurance and reinsurance sectors are subject to the supervision of the Luxembourg Insurance Commissariat (Commissariat aux Assurances, hereinafter: the "Commissariat"). At present over 260 reinsurance companies are authorised to perform their activities in and from Luxembourg. II. What is reinsurance? Defined traditionally, "reinsurance is the transaction by which an insurance company buys itself insurance for all or part of the risks that it guarantees to the insured, the objective of these reinsurance transactions being to spread the risks as much as possible". Captive reinsurance companies make up a special category among reinsurance companies. As a general rule, a captive reinsurance company is a company belonging to an industrial or a financial group. It mainly reinsures the risks of the companies forming part of that group. Under this system, the companies of the group normally buy insurance from professional insurers. These fronting insurers are typically asked to reinsure all or part of the risks insured for the group with the captive reinsurance company created for this purpose by the group. The captive reinsurance company may in turn reinsure part of the risks with other reinsurers in order to achieve an additional spread of the risks. 3
III. Why Luxembourg? In addition to general legal factors (A.) providing a flexible and appropriate framework intended to encourage the creation and ongoing operation of reinsurance companies, Luxembourg offers interesting tax legislation for reinsurance businesses (B.). A. General legal framework on reinsurance 1. Creation of a reinsurance undertaking The creation of a reinsurance company is governed by the law of 10 August 1915 on commercial companies, as amended, the Law of 1991 and the law of 8 December 1994 on the annual accounts of insurance and reinsurance undertakings, as amended. The legal framework applicable to Luxembourg reinsurance companies is completed by the Grand Ducal Regulation of 5 December 2007 specifying the conditions for approval and operation of reinsurance companies, as amended (hereinafter: the Regulation of 2007 ) and the Grand Ducal Regulation of 5 December 2007 specifying the conditions of the complementary supervision of insurance and reinsurance companies forming part of an insurance or reinsurance group. The Regulation of 2007 contains technical rules concerning the authorisation, the business plan, the solvency margin and the technical provisions of reinsurance companies. 1.1. License Any reinsurance company which establishes itself within the territory of the Grand Duchy of Luxembourg must be licensed by the competent minister before commencing its activities. The issuance of the license is subject to the following main requirements: a reinsurance company must limit its corporate purpose to the acceptance of risks ceded by insurance or reinsurance undertakings (or certain pension institutions) to the exclusion of direct insurance business; Article 94 point 1 of the Law of 1991, as modified, identifies the legal forms that can be adopted by a reinsurance company; the reinsurance company must have its central administration in the Grand Duchy of Luxembourg; the reinsurance company must establish a minimum guarantee fund and have a sufficient solvency margin. The guarantee fund is equal to one third of the required solvency margin and must amount to at least EUR 3,400,000 for a reinsurance company and EUR 1,225,000 for a captive reinsurance company; the company must, by way of a contract, secure the services of a natural or legal person whom it shall appoint to carry out the management of the reinsurance company. Such manager must be authorised by the competent minister. 4
1.2. Shareholders The license for a reinsurance company is subject to the Commissariat being informed of the names of the shareholders of the company. The quality of these shareholders must be deemed satisfactory in view of the need to ensure the sound and prudent management of the undertaking. The license is also conditioned by the transparency of the direct and indirect shareholding structure of the reinsurance company. 1.3. Managers and directors The reinsurance company must appoint one manager who must be authorised by the competent minister. In order to be authorised as a manager of a reinsurance undertaking, the proposed manager must provide proof of his/her good standing as well as a high level of professional knowledge of reinsurance matters. The manager must ensure the efficient and permanent management of the reinsurance undertaking via his/her effective presence in Luxembourg. If the position of manager of the reinsurance company is to be carried out by a legal entity, such legal entity must be represented by a natural person who is himself/herself duly authorised by the competent minister. The manager of a reinsurance company may be authorised to act for several reinsurance companies. The Commissariat must further be informed of the identity of a reinsurance company s directors. There is no residence or nationality condition imposed with respect to directors. 2. Conditions for the operation of a reinsurance business Luxembourg reinsurance undertakings must implement among others reliable administrative and accounting procedures and adequate internal control mechanisms. 2.1. Solvency margin Reinsurance companies must have a sufficient solvency margin in relation to their commitments. The Regulation of 2007 determines the method of calculation of the required solvency margin. The solvency margin of a reinsurance company consists mainly of: the paid-in share capital of the company; the legal free reserves not corresponding to commitments of the company; benefits and losses carried forward, after deduction of the dividends to be paid; subject to certain conditions, cumulative preferential shares, subordinated debts and equities with an unlimited duration; Intangible assets, certain participations held by the company and other elements listed by the Regulation of 2007 must be deducted from the abovementioned assets. 5
2.2. Technical provisions A reinsurance company must have sufficient technical provisions to meet its financial commitments including an equalisation reserve. Such reserve is further analysed under point B.2.1 hereafter. The assets representing the reinsurance company s technical provisions must take into account the type of business conducted by the company, in particular the nature, amount and duration of foreseeable claims, in order to guarantee the sufficiency, liquidity, security, quality, yield and congruence of the company s investments. The assets representing the company s technical provisions must be diversified and adequately spread to avoid excessive reliance on one single asset, issuer or group of companies. 2.3. Supervision of reinsurance undertakings The Commissariat is responsible for the supervision of reinsurance undertakings. As such, the Commissariat must ensure that reinsurance companies and their managers comply at all times with all requirements for operating a reinsurance business. The Law of 1991 further requires that reinsurance companies submit themselves to an annual external audit. The audit report must be forwarded to the Commissariat. 2.4. Outsourcing Luxembourg insurance and reinsurance companies may have certain aspects of their activities managed by specifically authorised professionals of the insurance sector under the supervision of the Commissariat. In particular, professionals licensed as management companies of reinsurance undertakings may provide daily management services in relation to the business of the reinsurance company. Such services notably include underwriting, policy administration, accountings and reporting. Luxembourg insurance legislation further allows the outsourcing of governance functions such as the actuarial function, internal audit, compliance and risk management. Management companies of reinsurance undertakings are further entitled to provide domiciliation services. The Commissariat must be notified prior to the outsourcing of critical or important functions or activities as well as any subsequent material developments with respect to those functions or activities. 3. European Law: the right of establishment or freedom to provide services The license granted to a Luxembourg reinsurance undertaking enables the undertaking to conduct its business in other EU countries, either under the right of establishment or the freedom to provide services, The establishment by a Luxembourg reinsurance company of a branch in another EU country is possible via mere notification thereof to the Commissariat, while the provision of reinsurance services in other EU countries is not subject to any prior formalities. 6
B. Tax factors The general Luxembourg tax regime (1.), combined with special tax rules for reinsurance undertakings (2.) has enabled Luxembourg to become an attractive domicile for reinsurance companies. 1. General tax regime of a Luxembourg company Luxembourg reinsurance companies are in essence treated like any other commercial company. They are fully taxable in accordance with the usual tax rules applicable in Luxembourg. Consequently, Luxembourg reinsurance companies are subject to the following taxes: 1.1. Registration tax (non-periodic tax) Further to the abolition of the capital duty law (effective as of 1 January 2009), the incorporation of a Luxembourg company, the modification of its articles of incorporation as well as the transfer of the seat of a company to Luxembourg are, as a rule, subject to a fixed duty of EUR 75. 1.2. Corporate income tax (periodic tax) The Luxembourg reinsurance company is subject to an annual corporate income tax (impôt sur le revenu des collectivités) on its net profit. Corporate income tax is levied at an effective maximum rate of 21% in 2014 (22.47% including a 7% surcharge for the employment fund); lower rates apply if the taxable profits do not exceed EUR 15,000. Tax losses may be carried forward. Technical provisions, including equalisation reserves are tax deductible. 1.3. Municipal business tax (periodic tax) The Luxembourg reinsurance company is subject to an annual municipal business tax. The applicable rate depends on the municipality in which the company is established. For Luxembourg city, the rate is 6.75 % in 2014. The tax profit as determined for corporate income tax purposes is applicable, with minor adjustments, for municipal business tax purposes. Technical provisions, including equalisation reserves, are tax deductible. 1.4. Net worth tax (periodic) Net worth tax is levied annually on the reinsurance company s net worth every 1 January at the rate of 0.5%. 7
1.5. Value added tax (VAT) Reinsurance companies are considered taxable persons for VAT purposes. Under Article 44 1 i) of the Luxembourg VAT Law, insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents, are VAT exempt. As reinsurance companies perform exempt insurance services, they are not entitled to input VAT deduction. However, a reinsurance company is entitled to deduct input VAT in so far as the goods and services purchased are used for the purposes of insurance and reinsurance transactions entered into with non- European customers. A reinsurance company is not required to register for VAT purposes unless part of its VAT exempt reinsurance activity is provided to non-european customers or it receives inter alia taxable intangible services from non-luxembourg suppliers (such as for example legal, tax or consulting services). Furthermore, the Luxembourg VAT Law contains a favourable VAT exemption applicable to services supplied by independent groups of persons to their members. The spirit of this VAT exemption consists of allowing specific categories of taxable persons, such as insurance and reinsurance companies, to pool resources and share related expenses without being subject to any additional VAT costs. 2. Special tax matters relevant to Luxembourg reinsurance companies 2.1. The equalisation reserve The Luxembourg Regulation dated 5 December 2007 requires reinsurance companies to establish an equalisation reserve in addition to the technical provisions to prevent any risk of fluctuation of future claims. Allocations to the technical provisions and equalisation reserve are tax deductible. The maximum amount of the equalisation reserve is calculated on the basis of figures set by the Commissariat for each company in accordance with the nature and volume of its business. As long as the reinsurance undertaking s equalisation reserve has not reached the maximum total amount, the undertaking will allocate its profits to such reserve. If, however, the reinsurance company sustains a loss over the period, an amount must be released from the reserve in order to fix the net result at zero. If the available reserve is insufficient to cover the current year s loss, then that loss may be carried forward for tax purposes in accordance with the usual statutory provisions (Article 114 of the Luxembourg income tax Law). 2.2. International tax questions In general, reinsurance companies are taxable commercial companies and are entitled to benefit from the double tax treaties concluded by the Grand Duchy of Luxembourg. Furthermore, the Luxembourg Law implementing the EU Parent-Subsidiary Directive is fully applicable to Luxembourg reinsurance companies. 8
Conclusion In only a few decades, the Grand Duchy of Luxembourg has become a major financial center that cannot be overlooked thanks to its thoroughgoing authorities and highly professional actors who have contributed to setting up an outstanding environment for insurance and reinsurance business. The insurance and reinsurance sector in Luxembourg is flourishing. Together with the local authorities, this dynamic Luxembourg business sector is continuously helping to improve the existing legal framework. As a result, the Grand Duchy of Luxembourg must be considered an ideal domicile for reinsurance undertakings in the long term. This document is intended to provide general information on the topic addressed therein. It is not intended to constitute legal advice nor shall it replace appropriate consultation with legal counsel. 9
For further information please contact: Paul Mousel Insurance & Reinsurance Law Partner Tel: +352 40 78 78 217 paul.mousel@arendt.com Pierre-Michaël de Waersegger Insurance & Reinsurance Law Senior Associate Tel: +352 40 78 78 496 pierre-michael.dewaersegger@arendt.com Catherine Bernardin Insurance & Reinsurance Law Senior Advisor Tel: +352 40 78 78 984 catherine.bernardin@arendt.com Our Insurance & Reinsurance Law Team is supported by our Tax Team: Eric Fort Tax Law Partner Tel: +352 40 78 78 306 eric.fort@arendt.com Bruno Gasparotto Tax Law Principal Tel: +352 40 78 78 909 bruno.gasparotto@arendt.com Alain Goebel Tax Law Partner Tel: +352 40 78 78 512 alain.goebel@arendt.com Thierry Lesage Tax Law Partner Tel: +352 40 78 78 328 thierry.lesage@arendt.com
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