In 2019, the Finance Court of Cologne (the referring court) requested a preliminary ruling from the European Court of Justice on a proceeding between a UK protection and indemnity insurance company (the claimant) and the Federal Central Tax Office for Germany (BZS) (the defendant). The request concerned a notice seeking payment of tax on insurance premiums paid with respect to the insurance of various marine risks (eg, protection and indemnity, hull and machinery, and war risks) linked to seagoing vessels in Germany's shipping register, while the flag of convenience was in the registers of either another member state (Malta) or a third state (Liberia), under a temporary flagging-out authorisation (bareboat charter) issued by Germany's Federal Maritime and Hydrographic Agency. The European Court of Justice issued its decision on 15 April 2021.(1)
There were multiple parties – both policyholders and co-insureds – involved in the insurance contracts in the main proceedings, such as the German shipping undertaking that manages the UK insurance company and whose fleet comprises seagoing vessels, and bareboat charterers established in Liberia and Malta.
The claimant had received premium payments that were not declared in Germany. However, the BZS issued a tax recovery notice to the claimant following a tax inspection carried out in 2012.
The claimant took action before the referring court, challenging the notice for recovery and claiming that, among other things, the insurance premiums at issue were not taxable since the risks associated with the insured ships had not been situated in Germany. According to the definition of "Member State where the risk is situated" in Second Council Directive 88/357 for Direct Insurance (in the second indent of article 2(d)), only the "Member State of registration" is relevant in this case. The "Member State of registration" is defined as a state that has certified that the ship concerned is fit for use, meaning the state whose flag is flown by the vessels.
The BZS argued with reference to the German Insurance Tax Act (VersStG) that the insurance premium at issue was fully taxable in Germany. Point 2 of the second sentence of paragraph 1(2) of the VersStG is an accurate transposition of the aforementioned second indent of article 2(d) of Second Council Directive 88/357 as it links the liability to pay the insurance tax not to the registration status of the ship concerned (in the sense of whether or not the vessel has been officially granted to operate), but to its presence on an official register and accompanying identification number. Only the shipping register, which in essence functions to prove the ownership of the ship concerned, can constitute such an official register according to the VersStG.
The referring court considered that, under the domestic law and, in particular, paragraph 1(2) of the VersStG, the insurance premiums that the claimant collected should be taxed in Germany since, among other reasons, the seagoing vessels at issue in the main proceedings had been registered in Germany on an "official or officially recognised register" within the meaning of that provision – namely, the shipping register. However, the referring court was uncertain whether this contradicted Second Council Directive 88/357, as the insurance policy in question related to "vehicles of any type", as referred to in article 2(d). Given that "Member State of certification" or "Member State of registration" are not defined terms under article 2(d), they could refer to the flag state, which determines the legal rules applicable to the operation of a seagoing vessel in the general course of trade and, therefore, determines the conditions governing use of that ship.
In light of the insurance of risks associated with the operation of seagoing vessels that are bareboat-chartered in another member state or a third state, the European Court of Justice ruled that the answer to the above question lies in the first subparagraph of article 46(2) of Directive 92/49. This subparagraph must be read in conjunction with the second indent of article 2(d) of Second Council Directive 88/357 and interpreted to mean that "the Member State where the risk is situated', which holds the exclusive power to tax premiums paid with respect to those insurance contracts, is the member state that maintains the shipping register to which the vessel is added with the main purpose of proving its ownership.
The European Court of Justice confirmed that the "Member State of registration", as it appears in the second indent of article 2(d), has not been defined in EU legislation. In fact, the definition was deliberately intended to avoid uniform legal criteria applicable to all member states in order to prevent double taxation and, simultaneously, eliminate tax avoidance practices.
The European Court of Justice held that it is therefore more suitable to define "the Member State where the risk is situated" as the state that has registered the ship for proof of ownership, as the link between the owner and the ship constitutes these necessary physical characteristics, which cannot be said of the link between the flag state and the liability for the ship. Such an interpretation is also confirmed by the fact that the insurance contracts with the ship owners have remained unaltered, despite the change of flag. Moreover, this criterion can also be applied uniformly to "vehicles of all kinds", such as those referred to in the second indent of article 2(d).
The European Court of Justice's verdict ended a year-long legal discussion regarding whether paragraph 1(2) of the VersStG referred to the shipping register proving ownership, or the register of the state that determines the legal rules applicable to the operation of a seagoing vessel. While the latest reform of the VersStG reform became effective from 10 December 2020, the wording of paragraph 1(2) of the VersStG remained unchanged and, therefore, the European Court of Justice's decision is applicable to it.
All parties involved in closing an insurance contract for seagoing vessels must follow this decision since the VersStG provides for a large circle of tax liable parties in paragraph 7, which is not limited to the policyholder as the tax debtor and the insurer as the tax payment debtor, but also includes insureds and brokers collecting premium payments.
Whether insurance tax applies in Germany in such cases raises financial questions as the national insurance tax rate for marine insurance is 19% (except for commercial hull and marine insurance, which is taxed at 3%), which is higher than other member states. On the other hand, registration in German registers is advantageous for German owners, who receive the so-called "tonnage tax" (which is, in fact, a fiscal benefit). This has supported the German shipping industry since 1999 and involves determining profits on the basis of ship size, rather than the actual profit. The prerequisite for this tax is that the company is domiciled in Germany and the ship appears in the German register. The European Court of Justice's decision, however, has minimised this benefit.
For further information on this topic please contact Carolin Schilling-Schulz at Arnecke Sibeth Dabelstein by telephone (+49 40 31 779 70) or email ([email protected]). The Arnecke Sibeth Dabelstein website can be accessed at www.asd-law.com.