insurance activities in Luxembourg

insurance activities in Luxembourg

Table of contents I. Luxembourg overview

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II. Why Luxembourg?

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A. General legal framework of insurance activity

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1. Creation of an insurance company

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2. Conditions for the operation of insurance business

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3. Passporting insurance services on the European market

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B. Tax factors

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1. Non-periodic taxes

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2. Periodic taxes

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3. Value added tax (VAT)

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4. International tax questions

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III. Focus on Luxembourg life insurance products

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A. The general features of Luxembourg unit-linked life insurance products

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B. The admitted underlying investments

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C. The management of the underlying assets

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D. The protection of the insurance assets

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Conclusion

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Arendt & Medernach Insurance & Reinsurance Law Team

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About Arendt & Medernach

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A broad range of practice areas

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Disclaimer: 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 a legal counsel.

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 580,000 inhabitants. The international character of the country is reflected in its varied thousand-year history and nowadays through the fact that foreigners, the majority of them from other European Union Member States, represent about 47% 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 parliament and a government underpinned by 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 development of the banking and insurance sector is also driven by an international, skilled and dynamic workforce. 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 7 December 2015 on the insurance sector, as amended (the “Law of 2015”) and by the regulation 15/03 of the Luxembourg supervisory authority, the Commissariat aux Assurances (the “CAA”), of 7 December 2015 relating to insurance and reinsurance undertakings (the “CAA Regulation 15/03”). Luxembourg legislation further provides for specific rules applicable to the insurance contract. Furthermore, numerous grand-ducal regulations and circulars issued by the supervisory authority supplement the insurance legal framework. In accordance with European legislation, the insurance sector is subject to the supervision of the CAA, which cooperates closely with foreign insurance supervisory authorities and with the Luxembourg supervisory authority for the financial sector, the Commission de Surveillance du Secteur Financier. At presently, over 85 insurance companies are authorised to perform their activities in and from Luxembourg.

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II. Why Luxembourg? Luxembourg offers a flexible regime intended to encourage the creation and ongoing operations of insurance companies (A.) as well as favourable tax legislation for insurance businesses (B.).

A. General legal framework of insurance activity 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 2015 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 supplemented by the CAA Regulation 15/03 and the Grand Ducal Regulation of 5 December 2007 specifying the conditions of the supplementary supervision of insurance and reinsurance companies forming part of an insurance or reinsurance group. The CAA Regulation 15/03 contains technical rules concerning the authorisation, business plan, solvency capital and technical provisions requirements applicable to 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 Minister of Finance before commencing its activities. The issuance of the license is subject to the following main requirements, which are examined by the CAA for each insurance company. An insurance company must: 

limit its corporate purpose to insurance activities and to the activities directly linked thereto, to the exclusion of any other commercial activities;

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adopt a legal form provided for by the Law of 2015;

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submit a business plan;

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the eligible own funds required to cover the solvency capital requirement, the minimum capital requirement and the absolute floor of the minimum capital requirement as laid down in the CAA Regulation 15/03;

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provide evidence that it will have a system of governance compliant with the Law of 2015;

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have its central administration in the Grand Duchy of Luxembourg.

1.2. Shareholders

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The license to carry out insurance activities is subject to the CAA being informed of the names of the shareholders who hold a qualifying holding in the company, along with the amount of such qualifying holding. The quality of these shareholders must be satisfactory in view of the need to ensure 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.

Why Luxembourg?

1.3. Managers and directors The insurance company must appoint and be effectively managed by at least one manager who must be authorised by the Minister of Finance. 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 condition with respect to the directors. Insurance companies must ensure that the authorised managers’ and directors’ professional qualifications, knowledge and experience are appropriate to enable the sound and prudent management of the undertaking, and they must notify the CAA of any changes made to the identity of such persons.

2. Conditions for the operation of insurance business Luxembourg insurance companies must implement among others reliable administrative and accounting procedures as well as adequate internal control mechanisms. 2.1. Supervision The CAA is responsible for the supervision of Luxembourg insurance companies as well as for the ongoing monitoring of the proper functioning of the insurance sector. As such, the CAA must ensure that insurance companies and their managers at all times comply with all requirements for the operation of insurance business. In this context, the CAA is responsible for (i) reviewing the applications for licenses by insurance companies as well as the prudential supervision thereof, (ii) issuing regulations in its field of competence and (iii) ensuring that insurance companies comply with their professional obligations including in relation to anti-money laundering and the fight against terrorist financing. The CAA performs its supervisory task in an open and instructive dialogue with the industry, based on a deep understanding of the latter’s needs and the challenges facing it. Using a prospective and risk-based approach, the CAA ensures that the requirements deriving from the Law of 2015 and any implementing measures are applied in a proportional way, with due consideration to the nature, the scope and the complexity of the risks inherent to insurance activities. The scope of the supervision performed by the CAA includes the financial supervision of insurance companies, including supervision of the activities performed by their branches or under the freedom to provide services principle. Such financial supervision covers the following aspects: the solvency, technical provisions, assets underlying the technical provisions and eligible own funds of insurance companies. The Law of 2015 requires that insurance companies undergo an annual external audit. Insurance companies must further disclose publicly, on an annual basis, a report on their solvency and financial condition. Insurance companies must set up an effective system of governance which must provide for the sound and prudent management of the business and which must include (i) an adequate transparent organisational structure with a clear allocation and appropriate segregation of responsibilities and (ii) an effective reporting system. Such system of governance must be subject to regular internal review and must be proportionate to the nature, scale and complexity of the operations of an insurance company. Insurance companies must further have written policies in relation to risk management, internal control, internal audit and outsourcing and must ensure that such policies are implemented, reviewed and adapted if necessary.

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Why Luxembourg?

In addition, insurance companies must set up an effective control system, which must at least include administrative and accounting procedures, an internal control framework, appropriate reporting arrangements and a compliance function. 2.2. Capital requirements Insurance companies must hold eligible own funds to cover the solvency capital requirement, the minimum capital requirement, and the absolute floor of the minimum capital requirement as defined by the CAA Regulation 15/03. 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 investment profile (see section III. B. hereafter). The insurance company must keep a permanent inventory of the assets representing its technical provisions and report them quarterly 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. 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 legislation allows for the outsourcing of certain functions such as the actuarial function, internal audit, compliance and risk management. The CAA must be notified prior to the outsourcing of key, critical or important functions or activities as well as any subsequent material developments with respect to such functions or activities. The management of the insurance undertaking must remain in a position to control the outsourced operations. In addition, central administration and data protection rules must be continuously complied with.

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Why Luxembourg?

3. Passporting insurance services on 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 principle. 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 free provision of insurance services in other Member States is subject to a mere notification requirement. In both cases, the CAA is the only competent supervisory authority for all business conducted by the Luxembourg insurance company.

B. Tax factors 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. Non-periodic taxes Further to the abolition of the capital duty law (effective since 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. Periodic taxes The Luxembourg insurance company is subject to an annual corporate income tax (impôt sur le revenu des collectivités) and an annual municipal business tax (impôt commercial communal) on its net profits. Corporate income tax is levied at an effective maximum rate of 21% in 2016 (22.47% including a 7% surcharge for the employment fund); lower rates apply if the taxable profits do not exceed EUR 15,000. Municipal business tax is levied at a variable rate according to the municipality in which the insurance undertaking is located/ incorporated. For Luxembourg City, the rate is 6.75% in 2016. The maximum aggregate corporate income tax and municipal business tax rate consequently amounts to 29.22% in Luxembourg City in 2016. Under Luxembourg bill of law n°7020, the maximum aggregate corporate income tax and municipal business tax rate in Luxembourg City would be decreased to 27.08% in 2017 and 26.01% in 2018. The Luxembourg insurance undertaking is furthermore subject to net worth tax levied annually every 1 January at a rate of 0.5%, and 0.05% for the upper tranche of the net worth exceeding EUR 500,000,000 applied on net assets as determined for net worth tax purposes. Since 2016, a minimum net worth tax applies. Besides, the Law of 2015 requires insurance companies to establish technical and mathematical provisions to prevent any risk of fluctuation of future claims. Allocations made to the technical and mathematical provisions are tax deductible. Moreover, a loss may be carried forward for tax purposes in accordance with the usual statutory provisions.

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Why Luxembourg?

3. 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 VAT exempt insurance services, they are not entitled to input VAT deduction. However, an insurance company is entitled to deduct input VAT insofar as the goods and services purchased are used for the purposes of insurance and reinsurance transactions entered into with customers established outside the European Union. An insurance company is not required to register for VAT purposes unless either (or both) of the following cases apply: - part of its VAT exempt insurance activity is provided to non-European Union customers; or - it receives taxable services from non-Luxembourg suppliers (such as for example legal, tax or consulting services). In this case, a VAT registration under a simplified regime is required even if the insurance undertaking is not involved in any non-European Union insurance activities. Furthermore, the Luxembourg VAT Law contains a VAT exemption applicable to services supplied by independent groups of persons to their members. This VAT exemption allows 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. It should however be noted that the VAT exemption regime applicable to independent groups of persons as currently implemented in Luxembourg has been recently challenged by the Court of Justice of the European Union and might therefore be subject to changes in the future.

4. 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. Furthermore, the Luxembourg Law implementing the European Parent-Subsidiary Directive is fully applicable to Luxembourg insurance companies.

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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 occurrence 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 which is used by the insurance company to purchase investment products, whose values will be determining the aforementioned benefits.

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 unless the policyholder has agreed on a specific guarantee with the insurance company, in exchange for the payment of an additional premium. 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.

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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 external funds, which correspond to shares in undertakings for collective investment issued by third parties; and/or,

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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

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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/or

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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 specifically 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 life insurance contract issued by a Luxembourg insurance company 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 1,000,000) 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 (without investment limits) 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.

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Focus on Luxembourg life insurance products

D. The protection of the insurance assets Luxembourg has put in place a strong protection regime when implementing the European directive on the reorganisation and winding-up of insurance undertakings. Pursuant to Article 118 of the Law of 2015, 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 owed 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 be dedicated to pay 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 to be one of the most protective regimes for policyholders, insured persons and beneficiaries within the European Union. Such protection regime applies to both life and non-life insurance business.

Conclusion In only a few decades, the Grand Duchy of Luxembourg has become a major financial centre distinguished by its high regulatory and supervisory standards, supportive and business-oriented authorities and highly skilled actors, who have contributed to setting up a prosperous and outstanding environment for insurance and reinsurance business. The insurance and reinsurance sector in Luxembourg is still flourishing. Together with the local authorities, this dynamic Luxembourg business sector is continuously helping to shape and modulate the existing legal framework in order to adopt it flexibly to evolving needs and challenges. This flexible legal framework, together with the proximity of the authorities to the industry makes the Grand Duchy of Luxembourg a unique and thriving domicile for insurance companies in the long term.

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Arendt & Medernach Insurance & Reinsurance Law Team Pierre-Michaël de Waersegger, Partner Email: [email protected] Tel: (352) 40 78 78 496

Paul Mousel, Partner Email: [email protected] Tel: (352) 40 78 78 217

Miryam Lassalle, Counsel Email: [email protected] Tel: (352) 40 78 78 50 80

Our Insurance & Reinsurance Law Team is supported by our Tax Team: Eric Fort, Partner

Bruno Gasparotto, Principal

Email: [email protected] Tel: (352) 40 78 78 306

Email: [email protected] Tel: (352) 40 78 78 909

Alain Goebel, Partner

Thierry Lesage, Partner

Email: [email protected] Tel: (352) 40 78 78 512

Email: [email protected] Tel: (352) 40 78 78 328

Jan Neugebauer, Partner Email: [email protected] Tel: (352) 40 78 78 377

About Arendt & Medernach Arendt & Medernach is the leading independent business law firm in Luxembourg. The firm’s international team of more than 300 legal professionals represents Luxembourg and foreign clients in all areas of Luxembourg business law from our head office in Luxembourg and our representative offices in Dubai, Hong Kong, London, Moscow, New York and Paris. We strive for excellence in order to achieve the best results for our clients and we always look for creative solutions. Our specialised practice areas allow us to offer a complete range of Luxembourg legal and tax services tailored to the client’s individual needs across all areas of business law.

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