Belgium’s unfriendly tax hits expat savers

On 1 January this year the Belgian government introduced a premium tax on life assurance contracts. The tax is levied at 1% on each regular premium paid by residents in Belgium on life assurance products held outside Belgium.

The procedures that the Belgian government wishes to see used to collect this new tax are unusual. Under Belgian law, the collection of the tax is the responsibility of the financial intermediary, if the intermediary is also resident in Belgium. These intermediaries might be financial advisers, insurance salesmen, tax or investment advisers.

To multi-billion euro life assurance companies with a presence in dozens of countries, the idea of ‘one man band’ insurance salesmen collecting taxes is fairly unappealing. The life assurance firms will ultimately be responsible for collection and payment to the Belgian state, but are given no role in how the tax collection is arranged. The potential for mistakes or non-collection by advisers who might fail to fulfil their obligations, move away from Belgium or leave the financial services industry is understandably troubling.

The new law affects many financial products, not just life assurance contracts, long term sickness schemes and critical illness plans. Long- term savings schemes are often established as a life assurance contract, so enabling investors to switch between funds while minimising or avoiding capital gains tax liability.

The EU directive on the taxation of income from cross-border investments, which came into effect last year, made contracts like this more appealing because they escaped the scope of the tax while other investments did not.

But life assurance companies are now facing some tough choices posed by the Belgian tax. The cost of amending existing business systems to comply with the tax has to be weighed against the likely income from new investors. Most international life assurance contract providers are likely to pull out of the expatriate market.

On 16 August, Friends Provident International announced that it would be accepting no more new business from Belgian residents with effect from 31 August. Nor will FPI allow those with existing contracts to increase their monthly investment.

FPI plans to continue to honour existing contracts and will pay the tax to the Belgian state anonymously. Which suggests that FPI wants to thwart any attempt by the Belgian state to use the tax to obtain the identities of cross-border investors.

The FPI decision is important because the company is one of the dominant players in the life assurance protection market for expatriates. FPI plans are operated from either Guernsey or the Isle of Man but are administered in the UK.

Many other financial services companies are in negotiations with the Belgian government over the tax and they may well decide to follow Friends Provident International and pull out of the Belgian market.

Whether or not they do so, since FPI is one of the main players in the expatriate life assurance market, its exit will reduce the choice of providers for expatriate investors in Belgium, who will be forced to take the offerings of Belgian companies.

All of which hardly amounts to a triumph for the EU’s efforts to open up financial markets across national borders.

• Stuart Langridge is an independent financial adviser. www.stockexchangesecrets.com

On 1 January this year the Belgian government introduced a premium tax on life assurance contracts. The tax is levied at 1% on each regular premium paid by residents in Belgium on life assurance products held outside Belgium.