Taking the tax headache out of investment income allocation

In the lead up to Solvency II, many groups have moved or are contemplating moving to a ‘hub and branch’ structure to manage capital and compliance demands more efficiently. A key consideration will be how to attribute investment income between the head office of the hub and its branches for tax purposes. By introducing a market-consistent economic basis for evaluating risks, which will be used across the EU, Solvency II could make it easier to carry out the necessary attribution and bring greater consistency to the application of the ‘arm’s length principle’.

This article focuses on investment income as this is proving to be one of the most challenging and contentious areas with tax authorities from a transfer pricing perspective.

Key points:

  • By introducing a market-consistent economic basis for evaluating risks, which will be used across the EU, Solvency II could make it easier to carry out the necessary attribution and bring greater consistency to the application of the ‘arm's length principle’.
  • The crux of the matter is what the most suitable proxy is, and how the rationale can be justified to the tax authorities.
  • While many of the considerations are far from clear cut, determining the right course could deliver significant benefits in terms of economic accuracy and EU-wide transparency.