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Italy General Insurance 1 Definition Definition of property and casualty insurance company A company which carries on general insurance business and to which specific legislation applies (Legislative Decree 17/3/1995, no. 175). Not defined by tax legislation. 2 Commercial Accounts/Tax and Regulatory Returns Basis for the company's commercial accounts Generally accepted accounting principles as set out in the Civil Code and in special legislation (Legislative Decree 26/5/1997, n. 173). N/A Regulatory return N/A N/A Tax return N/A Annual return required every year by the Tax Authorities from all companies. 3 Technical Reserves/ Equalisation Reserves Unearned premium reserves (UPR) Calculated according to the pro rata time apportionment principles or, if the result does not materially differ, by lump sums. In this case the reserve must be 35% of the gross premiums of the period, for general insurance; 40% of the premiums for automobile and boat liability insurance; 15% of the premiums for short-time risks. Allowed as per accounts. 2
Italy General Insurance (continued) Unpaid claims reported Established on the basis of a fair estimate of all foreseeable costs due for each claim. As an alternative, for sufficient amounts of homogeneous claims, it may be calculated on the basis of average costs of these claims. Allowed as per accounts. Claims incurred but not reported (IBNR) Established on the basis of principles suggested by the supervisory authorities, not yet issued. Allowed as per accounts. Unexpired risks calculated according to a prudent estimate of the possible future claims relating to the premiums earned, based on historical data on claims evolution Allowed as per accounts. General contingency/solvency reserves General contingency reserves not allowed. The allotment of integration reserves to meet solvency margin may be allowed through the revaluation of investments, as an exception to the general principles on assets evaluation in the financial accounts. Provisions to general contingency reserves non-deductible. Investment revaluation to meet solvency margin, if credited to a specific reserve, is not taxed; depreciation on the revaluated portion of investment is not deductible. 3
Italy General Insurance (continued) Equalisation/catastrophe reserves Allowed equalisation reserves based on the current law provisions include the following: Compensation reserves for debt insurance. Allowed maximum provision is the lesser of 12% of premiums and 75% of the technical balance. The reserve is not to exceed 1,5 times the highest amount of premiums in the last five years. Catastrophe reserves. Provision required is 2% of the premium. The reserve cannot exceed 75% of the premium.other equalisation reserves against fluctuations of claims evolution in the future years. Out of the above cases, these must be justified based on technical reasons in the Annex to the financial statement. Allowed as per accounts. 4 Expenses/Refunds Acquisition expenses Acquisition expenses may be charged in full in the year in which they are incurred, or alternatively amortised over a maximum of five years. Agents' commissions may be charged in full in the year in which they are incurred, or alternatively amortised over the duration of the underlying insurance contract. These commissions may be allocated, for 90% of their amount, to cover the technical reserves. Annual acquisition expenses are immediately deductible. Multi-annual acquisition expenses are deductible along the period to which they are referred. Annual agents' commissions are deductible in one year; multiannual commissions are deductible over a three-year period. 4
Italy General Insurance (continued) Loss adjustment expenses on unsettled claims (Claims handling expenses) According to general rule. Tax deductible in accordance with accounting rules. Experience-rated refunds Credited when earned. Taxed when taken to P&L account. 5 Investments Gains and losses on investments Unrealised gains may be recorded only to meet solvency margins (see above). Unrealised losses resulting from a permanent devaluation of durable investments must be taken to P&L account. Realised gains and losses are included in P&L account. Unrealised losses are deductible: for listed shares, bonds and securities, based on the quotations of the last month before year end, for unlisted shares and participations, based on the reduction of the underlying net equity, for unlisted bonds and securities, based on the devaluation of comparable listed bonds and securities. Unrealised gains and other unrealised losses are not relevant for tax purposes. Realised gains and losses are included in taxable income. Investment reserves Not provided. N/A (also see solvency reserves). 5
Italy General Insurance (continued) Investment income Included in profit and loss account. Investment income is taxed. Dividends from tax-paying Italian resident companies do not carry a tax credit since 1 January 2004. Dividends from non resident companies (except those resident in tax haven countries) are tax exempt for 40% or 95% of their amount, based on the shareholding ratio and on the country of residence of the dividend paying company. 6 Reinsurance Reinsurance premiums and claims Premiums are deducted from gross Follows accounting treatment. Premiums paid premiums. Claims paid are indirectly reduced by claims recovered. to group company should be at arm's length. 7 Mutual Companies Mutual companies (All profits returned to No special treatment. A share equal to 70% of income from financial members) statement must be taken to undistributable reserve, and is exempt from corporate tax. A share equal to 3% of income from financial statement (net of the share taken to undistributable reserve) must be paid to mutual funds ruled by law, and is exempt from corporate tax. 6
Italy Other Tax Features 8 Further corporate tax features Loss carryovers Five-year carry forward for corporate tax only. Carry forward with no time limit for start-up losses incurred in the first three years of a company. Carry back not allowed. Foreign branch income For corporate tax, the foreign branch income is fully taxed with credit for foreign tax or exempt, depending on Double Tax Treaty. Exemption from IRAP (see below). Domestic branch income Calculated under ordinary rules. Corporate tax IRPEG has been replaced by IRES starting from 2004. Corporate tax was at 36%, from 2003 35% and thereafter 33% 7
Italy Other Tax Features (continued) Regional tax on productive activities (IRAP) From 1998, a new tax named IRAP has been introduced, in substitution to other previously existing taxes and contributions. IRAP is applied on a wide tax basis, corresponding to the value of production (gross margin) and determined as the result of: (a) premiums and technical revenues + (b) revenues and gains from investment (c) commission and other acquisition expenses paid (d) claims incurred (e) expenses and losses from investment, interest paid +/- (f) profits/losses on technical reserves and other technical items (g) assets' depreciation (h) other administrative expenses, excluding any cost of personnel items. Tax rate applicable to the above taxable base up to now are: 5% (for 2001), 4.75% (for 2002) and 4.25% (for 2003) ). Starting from 2003, each region may increase/decrease tax rate by max 1%. 8
Italy Other Tax Features (continued) 9 Other tax features Premium taxes Vary from 2.50% to 21.25% depending on line of business. Capital taxes None Captive insurance companies No special treatment. 9
Italy Life Insurance 1 Definition Definition of Life Assurance companies A company which carries on Life Insurance business and to which specific legislation applies (Legislative Decree 17/3/1995, n. 174). Not defined by tax legislation. 2 Commercial Accounts/Tax and Regulatory Returns Basis for the company s commercial accounts Generally accepted accounting principles as set out in the Civil Code and in special legislation (Legislative Decree 26/5/1997, n. 173). N/A Regulatory return N/A N/A Tax return N/A Annual return required every year by the Tax Authorities from all companies. 3 General approach to calculation of income Allocation of income between shareholders and policyholders Separate accounting for policyholders and shareholder profits within statutory accounts (for certain revenue items). A total income approach including overall profit from underwriting and investment income. 10
Italy Life Insurance (continued) 4 Calculation of investment return Calculation of investment income Investment income included in profit and Investment income is taxed. and capital gains loss account. Unrealised losses are deductible: Unrealised capital gains may be recorded only to meet solvency margins (see above). Unrealised losses resulting from a permanent devaluation of durable investments must be taken to P&L account. Realised gains and losses are included in P&L account. for listed shares, bonds and securities, based on the quotations of the last month before year end, for unlisted shares and participations, based on the reduction of the underlying net equity, for unlisted bonds and securities, based on the devaluation of comparable listed bonds and securities. Unrealised gains and other unrealised losses are not relevant for tax purposes. Realised gains and losses are included in taxable income. 5 Calculation of underwriting profits or total income Actuarial reserves These are to be calculated based on prudent Tax deductible in accordance with actuarial methods and certified by an external accounting rules. actuarial expert. 11
PREVIOUS NEXT EXIT PRINT Italy Life Insurance (continued) Acquisition expenses Acquisition expenses may be charged in full in the year in which they are incurred, or alternatively amortised over a maximum of five years. Agents' commissions may be charged in full in the year in which they are incurred, or alternatively amortised over the duration of the underlying contract, within the limits of the corresponding premium loadings These commissions may be allocated, for 90% of their amount, to cover the technical reserves. Annual acquisition expenses are deductible immediately. Multi-annual acquisition expenses are deductible along the period to which they are referred. Annual agents' commissions are deductible in one year; multi-annual commissions are deductible alternatively all in the same year or over a three-year period. If these commissions are allocated to cover the technical reserves, they are deductible along the duration of the underlying contract, but limited to ten years. Gains and losses on investments Unrealised capital gains may be recorded only to meet solvency margins (see above). Unrealised losses resulting from a permanent devaluation of durable investments must be taken to P&L account. Realised gains and losses are included in P&L account. Unrealised losses are deductible: for listed shares, bonds and securities, based on the quotations of the last month before year end, for unlisted shares and participations, based on the reduction of the underlying net equity, for unlisted bonds and securities, based on the devaluation of comparable listed bonds and securities. Unrealised gains and other unrealised losses are not relevant for tax purposes. Realised gains and losses are included in taxable income. Reserves against market losses on investment Allowed. Not allowed in general. 12
Italy Life Insurance (continued) Dividend income Included in profit and loss account. Dividends from tax-paying Italian resident companies do not carry a tax credit since 1 January 2004. Dividends from non resident companies (except those resident in tax haven countries) are tax exempt for 40% or 95% of their amount, based on the shareholding ratio and on the country of residence of the dividend paying company. Policyholder bonuses Deducted from net profit after tax. Tax deductible. Other special deductions None. None. 6 Reinsurance Reinsurance Premiums paid are deducted from gross premiums. Claims paid are indirectly reduced by claims recovered. Follows accounting treatment. Premiums paid to group company should be at arm's length. 7 Mutual companies/stock companies Mutual companies No special rules. A share equal to 70% of income from financial statement must be taken to undistributable reserve, and is exempt from corporate tax. A share equal to 3% of income from financial statement (net of the share taken to undistributable reserve) must be paid to mutual funds ruled by law, and is exempt from corporate tax. 13
Italy Other Tax Features 8 Further corporate tax features Loss carryovers Five-years carry forward for corporate tax only. Carry forward with no time limit for start-up losses incurred in the first three years of a company. Carry back not allowed. Foreign branch income For corporate tax the foreign branch income is fully taxed with credit for foreign tax or exempt depending on Double Tax Treaty. Exemption from IRAP (see below). Domestic branch income Calculated under ordinary rules. Corporate tax rate called up to now IRPEG is replaced by IRES since 2004. Corporate tax was 36%, from 2003, 35% and thereafter 33% Substitute Tax From the tax year commencing or in course on 1 January 2004, by art. 2 of Decree-Law 209/2002, the EU life insurers running business in Italy in free provision of services regime are to pay a substitute tax of 0.2% of the mathematical reserves on the life policies in place with Italian clients (excluding life contracts covering death or invalidity risk, pension funds and individual pension plans). This substitute tax is to be paid within 20 June of each year and is treated as an advance payment of the withholding taxes on policy repayments. 14
Italy Other Tax Features (continued) Regional tax on productive activities (IRAP) From 1998, a new tax named IRAP has been introduced, in substitution to other previously existing taxes and contributions. IRAP is applied on a wide tax basis, corresponding to the value of production (gross margin) and determined as the result of: (a) premiums and technical revenues + (b) Revenues and gains from Investment (c) Commission and other Acquisition expenses paid --(d) Claims incurred (e) Expenses and losses from Investment, Interest paid +/- (f) profits/losses on technical reserves and other technical items (g) assets' depreciation (h) other administrative expenses, excluding any cost of personnel items. On such tax base the tax rates apply up now are: 5% (for year 2001), 4.75% (for year 2002) and 4.25% (for year 2003) ). From 2003, each region may increase/decrease tax rate by max 1%. 15
Italy Other Tax Features (continued) 9 Policyholder taxation Deductibility of premiums A tax deduction of 19% of the premium paid, not exceeding Euros 1.291, is allowed on contracts executed until 31 December 2000. No tax deduction allowed on contracts executed thereafter. Interest build-up Taxable upon formation, in case of contracts for the formation of an (ordinary) annuity. Otherwise, taxed when paid. Proceeds during lifetime Taxable when paid. Proceeds on death Not taxable. 10 Other tax features Premium taxes 2.50% of premiums paid, on contracts executed until 31 December 2000. No premium tax on contracts executed thereafter. Capital taxes None. Captive insurance companies No special rules. 16
Italy Other Tax Features (continued) Italian Direct Tax Reform taxation of insurers by Article 111 of Legislative Decree 12 Dec. 2003 n. 344 (Official Gazette n. 291 of 16.12.2003) The direct tax reform of corporate entities was approved and will be effective as of 1 January 2004. In particular, one important modification for life insurers is that, the revenues / costs from the variation of the mathematical reserves of life insurance contracts for which the investment risk is borne by the insured are taxable / deductible, excluding both the corresponding write-ups / write-downs of the underlying financial investments and the corresponding gains / losses / dividends exempt pursuant to the new "participation exemption" rule. 17
PREVIOUS EXIT PRINT Contact information > Name: Phone: Email: Marcello Romano (+39) (06) 57028.2631 marcello.romano@studiopirola.com Alberto Santi (+39) (06) 57028.2606 alberto.santi@studiopirola.com Maria Gioina Corbo (+39) (06) 57028.2613 maria.gioina.corbo@studiopirola.com Pirola Pennuto Zei & Associati Largo Angelo Fochetti 28 00151 Rome Italy 18