CJEU issues ruling concerning the discriminatory treatment of non-resident insurance companies

What happened?

The Court of Justice of the European Union (CJEU) issued its ruling in case C-782/22, concerning the discriminatory treatment of non-resident insurance companies. The ruling addresses national legislation that reserves to resident companies the possibility of:

• deducting from their taxable profits relating to investment income the expenses corresponding to their commitments to their customers under unit-linked insurance contracts, as well as
• offsetting in full the withholding tax (WHT) on dividends against final corporate income tax (CIT) liabilities.

Why is it relevant?

This judgment provides an opportunity for non-resident insurance companies (within and outside the European Union) investing in Portuguese financial assets to recover the amounts of income (dividend, interest) withholding tax imposed in Portugal in so far as they give rise to commitments before their clients under unit-linked products.

Portugal meets the criteria set out in this ruling regarding the definition of potentially discriminatory treatment. Portugal does not allow non-resident insurance companies to deduct their commitments against the income received. This results in a final WHT liability that exceeds the liability applicable to comparable resident insurance companies receiving dividends or interest from Portuguese companies.

Actions to consider

Insurance companies should evaluate the reach and impacts of this decision at their level, including:

• Assess WHT paid on gross income sourced in Portugal and whether that income may be linked to commitments under unit-linked products. 
• File claims for refunds: in Portugal such procedures can be initiated for a period up to four years after the tax has been withheld.
• Anticipate future discrimination cases that, following other EU case law on this subject, may find the imposition of WHT on gross income amounts to run against EU free movement of capital.

On November 7, 2024, the CJEU rendered its decision, which involved a UK-based insurance company that received dividends from Dutch shareholdings. Under the relevant unit-linked insurance contracts the Insurance Company was bound to pass-on-through such dividends to its policy holders. The gross dividend income was subject to a final 15% dividend WHT.

The different treatment invoked by the plaintiff lies in the fact that for Dutch taxpayers this 15% WHT on dividend income acts as an advance payment of the final corporate income tax (CIT) due on such income. These taxpayers can offset their commitments to clients under unit-linked insurance products against the amounts received. However, this same treatment is not extended to non-resident insurance companies. Consequently, resident entities may not be effectively taxed on at least part of the dividends, as there is a direct link between the dividends received and the increase in commitments to unit-linked policy holders.

When rendering its decision, the Court referred to its earlier case-law, namely cases C-641/17 and C-18/15. In so doing, the Court evaluated the business model of insurance companies with obligations under unit-linked contracts in the light of its previous considerations regarding the business model of pension funds, as well as the final WHT on the gross amount of interest received by non-resident taxpayers.

The Court found the situation of UK insurance companies trading in unit-linked products to be objectively comparable to that of Dutch insurance companies trading in similar insurance products. It concluded that no overriding reasons of public interest could justify this restriction of the EU free movement of capital, as enshrined in article 63 of the Treaty on the Functioning of the European Union.