insurance activities in Luxembourg
insurance activities in Luxembourg
Table of contents I. Luxembourg overview 5 II. Why Luxembourg? 6 A. General legal framework on insurance 6 1. Creation of an insurance company 6 2. Conditions for the operation of insurance business 7 3. Passporting insurance services into the European market 8 B. Tax factors 8 1. Registration tax (non-periodic tax) 8 2. Corporate income tax (periodic tax) 8 3. Municipal business tax (periodic tax) 9 4. Net worth tax (periodic tax) 9 5. Value added tax (VAT) 9 6. International tax questions 9 III. Focus on Luxembourg life insurance products 10 A. The general features of Luxembourg unit-linked life insurance products 10 B. The admitted underlying investments 11 C. The management of the underlying assets 11 D. The protection of the insurance assets 12 Conclusion 13 Arendt & Medernach Insurance & Reinsurance Law Team 15 About Arendt & Medernach 16 A broad range of practice areas 17
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 international character of the country is underlined by its varied thousand-year history and, nowadays, by the fact that foreigners, the majority of them from other European Union Member States, represent about 40% of the total population. As a result of this, 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 outstanding economic, political, social, and tax stability but also an excellent legal framework. The Luxembourg government has supported the development of a banking centre since the 1960s and Luxembourg has become a major banking centre in only a few decades. The per capita GDP has increased to become one of the highest in the world. The domestic legislation governing insurance, initially introduced in 1853, has been regularly updated, in particular in light of the applicable European legislation. The Luxembourg insurance sector is currently governed by the law of 6 December 1991 on the insurance sector, as amended (the Law of 1991 ). Luxembourg legislation further provides for specific rules applicable to the insurance contract. Numerous Grand-Ducal regulations and circulars issued by the supervisory authority complete the legal framework. In accordance with European legislation, both insurance and reinsurance sectors are subject to the supervision of the Luxembourg insurance supervisory authority, the Commissariat aux Assurances (the CAA ). Presently, over 75 insurance companies are authorised to perform their activities in and from Luxembourg. 5
II. Why Luxembourg? Luxembourg offers a flexible regime intended to encourage the creation and ongoing operation of insurance companies (A.), as well as favourable tax legislation for insurance businesses (B.). A. General legal framework on insurance 1. Creation of an insurance company The creation of an insurance 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 insurance companies is completed by the Grand Ducal Regulation of 14 December 1994 specifying the conditions for approval and operation of insurance companies (the Regulation of 1994 ) and the Grand Ducal Regulation of 5 December 2007 specifying the conditions of the complementary supervision of insurance and reinsurance companies being part of an insurance or reinsurance group. The Regulation of 1994 contains technical rules concerning the authorisation, business plan, solvency margin and technical provisions of insurance companies. 1.1. License Any insurance 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: an insurance company must limit its corporate purpose to insurance activities and to the activities directly linked to insurance activities, to the exclusion of any other commercial activities; the insurance company must adopt a legal form admitted by the Law of 1991; the insurance company must have its central administration in the Grand Duchy of Luxembourg; the insurance company must establish a minimum guarantee fund and have a sufficient solvency margin. 1.2. Shareholders The license for an insurance company is subject to the CAA being informed of the names of the shareholders of the company. The quality of these shareholders must be satisfactory in view of the need to ensure a sound and prudent management of the company. The license is also dependent on the transparency of the direct and indirect shareholding structure of the insurance company. 6 1.3. Managers and directors The insurance company must appoint one manager who must be authorised by the competent Minister. In order to be authorised as a manager of an insurance company, the proposed manager must provide proof of his or her good standing, high level of professional knowledge of insurance matters and have his or her domicile or elected domicile in Luxembourg. The CAA must further be informed of the identity of the insurance company s directors. There is no residence or nationality condition with respect to the directors.
Why Luxembourg? 2. Conditions for the operation of insurance business Luxembourg insurance companies must have among others reliable administrative and accounting procedures and adequate internal control mechanisms. 2.1. Supervision The CAA is responsible for the supervision of Luxembourg insurance companies. As such, the CAA must ensure that insurance companies and their managers at all times comply with all requirements for operating insurance business. The Law of 1991 further requires that insurance companies undergo an annual external audit. The audit report must be forwarded to the CAA. 2.2. Solvency margin Insurance companies must have a sufficient solvency margin in view of their commitments. The Regulation of 1994 determines the methods of calculation of the required solvency margin. The solvency margin of an insurance 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 1994 must be deducted from the above-mentioned assets. 2.3. Technical provisions Luxembourg insurance companies are required to establish sufficient technical provisions in respect of their entire business. The technical provisions must be covered by matching assets. The assets representing the insurance company s technical provisions must take into account the type of business conducted by the company in order to guarantee the security, yield and liquidity of the company s investments. They must be diversified and adequately spread in compliance with the framework provided by the applicable regulation as to the assets representing technical provisions for non-life insurance and life-insurance products with profits. Assets underlying unit-linked life insurance contracts are subject to specific investment rules depending on the policyholder s client profile (see section III. B. hereafter). The insurance company must keep a permanent inventory of the assets representing its technical provisions and report them periodically to the CAA. 2.4. Custody requirements Luxembourg insurance law requires that a deposit agreement be entered into between a Luxembourg insurance company and its custodian bank for the purpose of the custody of assets underlying the technical provisions of the insurance company. The deposit agreement is further subject to the approval of the CAA. The custodian bank may be situated either in Luxembourg or abroad. This includes credit institutions licensed in any Member State of the European Union, including branches thereof situated either in the Member State of the head office or in another Member State. Assets representing the technical provisions of a Luxembourg insurance company may further be deposited with the head office of a credit institution situated outside the European Union. 7
Why Luxembourg? All assets deposited with the custodian bank which underlie the technical provisions of the insurance company must be clearly segregated from the other liabilities and assets of the insurance company held with said custodian bank. 2.5. Outsourcing Luxembourg insurance companies may have certain aspects of their activities managed by specifically authorised professionals of the insurance sector under the supervision of the CAA. Such professionals may notably be licensed as portfolio administration companies, management companies for captive insurance undertakings or for run-off insurance undertakings and provide the corresponding daily management services. Luxembourg insurance legislation further allows the outsourcing of governance functions such as the actuarial function, internal audit, compliance and risk management. Management companies of captive insurance undertakings are further entitled to provide domiciliation services. The CAA shall be notified prior to the outsourcing of critical or important functions or activities as well as any subsequent material developments with respect to such functions or activities. 3. Passporting insurance services into the European market The license granted to a Luxembourg insurance company enables such company to conduct its business in other European Union countries under either the right of establishment or the freedom to provide services. The establishment by a Luxembourg insurance company of a branch in another European Union country is subject to a prior authorisation from the CAA notably on the basis of the solvency of the Luxembourg insurance company and the business plan of the branch. The provision of insurance services in other Member States is subject to a mere notification requirement. In both cases, the CAA remains the only competent supervisory authority for all business conducted by the Luxembourg insurance company, including in any other Member State. B. Tax factors The general Luxembourg tax regime has enabled Luxembourg to become an attractive domicile for insurance companies. Luxembourg insurance 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 insurance companies are subject to the following taxes: 1. Registration tax (non-periodic tax) 8 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. 2. Corporate income tax (periodic tax) The Luxembourg insurance company is subject to an annual corporate income tax (impôt sur le revenu des collectivités) on its net profits. Corporate income tax is levied at an effective maximum rate of 21% in 2015
Why Luxembourg? (22.47% including a 7% surcharge for the employment fund); lower rates apply if the taxable profits do not exceed EUR 15,000. The Law of 1991 requires insurance companies to establish a solvability margin, as well as the technical and mathematical provisions to prevent any risk of fluctuation of future claims. Allocations to the technical and mathematical provisions are tax deductible. A loss may be carried forward for tax purposes in accordance with the usual statutory provisions (Article 114 of the Luxembourg income tax Law). 3. Municipal business tax (periodic tax) The Luxembourg insurance 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 2015. The tax profit as determined for corporate income tax purposes is applicable, with minor adjustments, for municipal business tax purposes. Allocations to the technical and mathematical provisions are tax deductible. 4. Net worth tax (periodic tax) Net worth tax is levied annually on the insurance company s net worth every 1 January at the rate of 0.5%. 5. Value added tax (VAT) Insurance 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 insurance companies perform exempt insurance services, they are not entitled to input VAT deduction. However, an insurance 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. An insurance company is not required to register for VAT purposes unless part of its VAT exempt insurance 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. 6. International tax questions In general, insurance companies are taxable commercial companies and are entitled to benefit from the double tax treaties concluded by the Grand Duchy of Luxembourg. 9 Furthermore, the Luxembourg Law implementing the European Parent-Subsidiary Directive is fully applicable to Luxembourg insurance companies.
III. Focus on Luxembourg life insurance products Under Luxembourg law, an insurance contract is a contract whereby, in consideration of the payment of a premium by the policyholder, the insurer commits to pay a benefit in case of a specified uncertain future event. Such event must adversely affect the interests of the insured in case of non-life insurance or the life, or bodily integrity, of the insured in case of life insurance. Luxembourg insurance companies have developed a broad range of life insurance products including contracts intended for high net worth clients. They have become the leading European providers of sophisticated unitlinked life insurance products whereby the insurer makes a commitment to the policyholder to provide a benefit to the beneficiary at the death of the insured person (or at a given moment in time foreseen in the policy), in consideration for the payment of a premium by the policyholder. A. The general features of Luxembourg unit-linked life insurance products The policyholder is the contracting party of the insurance company and hence the sole owner of all the rights vis-à-vis the insurance company under the life insurance contract. Luxembourg life insurance contracts generally provide for a surrender right whereby the policyholder may request at any time the partial or total surrender of the life insurance contract. A unit-linked life insurance contract does not offer any guarantee as to the surrender value which will vary according to the value of the underlying assets. At the death of the insured person, the insurance company must pay to the beneficiary specified in the contract a benefit corresponding to the value of the assets underlying the life insurance contract net of all expenses and charges. The value of such benefit is not guaranteed, but varies according to the market conditions. A Luxembourg life insurance contract may further be used as collateral for the purpose of securing a credit agreement entered into by the policyholder or a third party with a Luxembourg or a non-luxembourg credit institution. 10
Focus on Luxembourg life insurance products B. The admitted underlying investments The premium paid by the policyholder is invested pursuant to the policyholder s instructions and in compliance with the investment profile chosen as well as the applicable regulations. The premium paid by the policyholder of a unit-linked life insurance contract may be invested in the following assets: units of so-called external funds, which correspond to shares in undertakings for collective investment issued by third parties; and/or, units of insurance internal collective funds, which are collective investment schemes set up by the relevant life insurance company in compliance with the applicable regulatory restrictions; and/or one or more dedicated internal funds, which correspond to pools of assets set up by the relevant life insurance company in compliance with the applicable regulatory restrictions and the investment policy defined by the policyholder; and/or one or more specialised insurance funds which are set up by the relevant life insurance company for the purpose of investing in certain categories of assets in compliance with the applicable regulatory restrictions. A dedicated fund or a specialised insurance fund may only underlie one given life insurance contract and hence corresponds to a tailor-made investment option designed for the policyholder. C. The management of the underlying assets All assets underlying a life insurance contract are solely owned by the insurance company which enters into a management agreement with Luxembourg or non-luxembourg asset managers for the purpose of managing such assets in compliance with the regulatory framework and the investment policy defined by the policyholder. A management company can be entrusted by a life insurance company with the management of the assets underlying one or several insurance contracts issued by such insurance company. The assets admissible as underlying investments under a Luxembourg life-insurance contract are determined in accordance with the investment profile of the policyholder which is in principle related to the amount of the initial premium paid by the policyholder as well as the amount of his/her/its total wealth. Where the premium paid by the policyholder is considerable (over EUR 2,500,000) and the wealth invested in transferable securities by such policyholder is substantial (over EUR 2,500,000), the applicable investment restrictions will be extremely flexible. Investments under the corresponding dedicated fund may be performed in any financial instrument within the meaning of the European directive on markets in financial instruments, to the exclusion of any other assets. On the other hand, if the initial premium paid by the policyholder as well as his/her/its previous investments in transferable securities are less substantial, the list of admissible assets will be more restricted and/or the applicable investment limits will be lower. 11
Focus on Luxembourg life insurance products D. The protection of the insurance assets Luxembourg has put in place a strong protection regime while implementing the European directive on the reorganisation and winding-up of insurance undertakings. Pursuant to Article 39 of the Law of 1991, all assets underlying the technical provisions of an insurance company constitute a separate pool of assets which shall preferentially secure the payment of insurance claims. Insurance claims are defined as any amount due by the insurance company to insured persons, policyholders, beneficiaries or any victim having a direct claim against the insurance company and which results from an insurance contract. Premium refunds due by the insurer in the event of a renunciation or cancelation of the policy are also included in the definition of insurance claims. In case of insolvency of the insurance company, the assets representing the technical provisions will not face all of its commitments but only the insurance claims. Concretely, insurance creditors are guaranteed to be paid from such assets before all other creditors of the insurance company. In case the separate pool of assets is not sufficient to cover the total claims of all insurance creditors, the policyholders, insured persons and beneficiaries retain a preferential right on the other assets of the insurance company for the difference between the amount of their claim and the amount recovered on the assets representing the technical provisions. Such additional preferential right overrides any other right, excluding those of certain preferred creditors. The Luxembourg protection regime is generally considered as one of the most protective regimes for policyholders within the European Union. Such protection regime applies to both life and non-life insurance business. 12
Conclusion In only a few decades, the Grand Duchy of Luxembourg has become a major financial centre which cannot be overlooked on account of 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 insurance companies 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. 13
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Arendt & Medernach Insurance & Reinsurance Law Team Paul Mousel, Partner Catherine Bernardin, Senior Advisor Email: paul.mousel@arendt.com Tel: (352) 40 78 78 217 Email: catherine.bernardin@arendt.com Tel: (352) 40 78 78 984 Pierre-Michaël de Waersegger, Senior Associate Email: pierre-michael.dewaersegger@arendt.com Tel: (352) 40 78 78 496 Our Insurance & Reinsurance Law Team is supported by our Tax Team: Eric Fort, Partner Bruno Gasparotto, Principal Email: eric.fort@arendt.com Tel: (352) 40 78 78 306 Email: bruno.gasparotto@arendt.com Tel: (352) 40 78 78 909 Alain Goebel, Partner Thierry Lesage, Partner Email: alain.goebel@arendt.com Tel: (352) 40 78 78 512 Email: thierry.lesage@arendt.com Tel: (352) 40 78 78 328 www.arendt.com Arendt & Medernach 2015
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