Withholding tax on income from foreign investments is included in the tax expenditure of the life or health insurer although this tax is predominantly borne by the policyholder. This procedure inflates the tax expenditure of the life or health insurer and as a result distorts the effective tax rate.
A foreign company, in which a life or health insurer of our Group holds shares, distributes a dividend of €100 for the shares held by the insurer. 10% of this is deducted for withholding tax, and €90 go to Germany. The policyholders are entitled to at least 90% of that amount, i.e. €81 in our example. The life insurer’s share is €9. Besides the foreign withholding tax burden of €10, a 40% tax or €7.60 is also levied in Germany on the taxable base of €19. However, of the foreign withholding tax that can be credited against the German tax burden (and thus recoverable by the insurance undertaking) only 26.4% or €5 (corporation tax and solidarity income-tax surcharge) of the taxable base of €19 may be credited against tax. This leaves a tax expenditure of €12.60, while the result before tax is €19 (dividend of €100 less the policyholders’ share of €81). The effective tax rate is around 66.3%.
Changes in exchange rates are primarily relevant to reinsurance business. The bulk of our primary insurance business is transacted in euros.
In the case of reinsurance, the principle of currency matching applies for the balance sheet. This means that foreign currency liabilities are generally matched with equal amounts of investments in the same currency to safeguard against exchange losses. In the income statement, the effect on the premium is mitigated by similar effects on losses and expenses.
The balance sheets of our foreign subsidiaries are translated into euros at the exchange rates applicable at year-end, and their income statements at the average quarterly rates; any translation differences arising in the process are recognised in equity.