Insurance firms welcome ECJ ruling on tax barriers

Date: 21/05/1998

By Myles Neligan

A RECENT European Court of Justice decision has been hailed as a vital stepping-stone in the creation of a single market for insurance policies, pensions and other financial products.

The Court ruled last month that Swedish legislation imposing punitively high tax rates on premiums paid by Swedish citizens on life insurance policies taken out with non-Swedish companies was discriminatory and in breach of EU law.

The case began when a Swedish citizen holding a life insurance policy with a German group asked a regional court to annul the Stockholm government's assessment of her tax bill.

Her complaint was referred to the ECJ, resulting in the ruling which has been warmly welcomed by EU insurance firms. “This is a positive step which will work to the advantage of both our industry and our citizens,” said a spokeswoman for the European Committee of Insurers (CEA).

Internal Market Commissioner Mario Monti has also welcomed the decision, saying: “This case is a very important judgement and will be very helpful in ending tax discrimination in relation to the nationality of individuals.”

Monti has consistently identified differential tax regimes on financial products as the main obstacle to a free EU market in financial services.

Observers expect a considerable increase in cross-border purchases of insurance policies as a result of the ruling, with the Association of British Insurers telling its members that “the implications for companies seeking to sell insurance and retirement benefit products across EU borders are highly positive, as the case must reduce tax barriers to such business”.

The UK insurance industry is one of the most liberalised in the EU, with its bigger companies taking up an increasingly large share of the continental European market. British and German firms are expected to benefit most from the ECJ's judgement.

But insurers in countries such as Belgium, where the industry is more protected from international competition, will be watching developments carefully.

The present case casts new light on a 1992 ECJ judgement which narrowly upheld the Belgian government's refusal to allow a resident in Belgium to deduct from his tax bill contributions towards a life insurance policy held in Germany.

The Court agreed the Belgian state's stance was in breach of EU treaty articles guaranteeing workers' freedom of movement, but said that it could not intervene because to do so would interfere with Belgium's “fiscal cohesion”.

The judgement reflected widespread recognition that the lack of fiscal harmonisation between member states presented too serious an obstacle for a single market in insurance policies and pensions to function effectively.

Now the tide may be turning. Although the European Commission is still shying away from forcing national governments to align their respective tax regimes, the ECJ's latest ruling is sure to encourage further legal challenges from EU citizens.