Tax

Not all classifications of risks are the same globally. Identifying the risk insured and then applying country specific rules will be necessary to determine the location of a risk and the correct premium tax treatment.

The Risk Locator tool and our ‘How to Establish Risk Location’ guide will support this process. In many situations, the location of risk for tax matches the regulatory risk location.

The EEA uses the same regulatory framework, including location of risk rules. Insurers can apply a single set of rules when determining the location of the risk covered by a policy throughout the EEA.

Outside the EEA, each country has its own specific location of risk rules and regulatory framework. These rules determine the tax and regulatory treatment of insurance premiums based on the location of the insured risk. In many non-EEA jurisdictions, insurance premiums are subject to tax based on the location of the insured risk rather than the insurer's home country. The tax rates and calculation methods can vary significantly from country to country. Commercially available tools can be subscribed to and should assist a managing agent in forming its decision on risk type and location. Lloyd’s provides a tool called Crystal which has guidance on classifying risk type and location of risk, but Crystal’s contents should not be regarded as advice or relied upon.

Identifying risk type and location can be a complex process. All insurance companies as well as managing agents and brokers that operate internationally may need to consult with tax advisors to understand the specific rules and requirements that apply to risks written in a particular jurisdiction.

Splitting premium and allocating it to different geographies and risk types is essential to ensure accurate tax calculations. Whilst there is generally no legislation that provides details of how a premium should be split there is guidance and market practice as to how it could be done.

Premiums must be split and allocated to geography as well as risk type and policyholder. Premiums should be split on a just and reasonable basis. Insurers, managing agents, and brokers should maintain clear and accurate records detailing the methodology used for premium splits and any supporting calculations.

Below are examples of risk allocation methods:

• Buildings and/or contents - Value of local property divided by value of total property
• Directors & Officers – Number of local Directors divided by total Directors
• Employee Liability – Number of local employees divided by total employees

To determine the applicable premium tax and tax rates for insurance premiums, it is advisable to engage the services of a third-party expert specialising in tax and insurance regulations. These experts have in-depth knowledge of tax laws and regulations in various jurisdictions and can provide accurate and up-to-date information specific to your insurance business. Crystal (Lloyd’s database of applicable taxes) contains some helpful guidance on such these issues but should not be relied on.

Where there are no separate local insurance policies, settlement of premium should occur via XIS. For local policies, local collection of premium and associated taxes and charges may apply and will not be administered centrally by Lloyd’s.

XIS process almost all insurance premiums for the Lloyd’s market. They check, validate and input policy information from the Market Reform Contract (MRC) into their system. 

Keep records of policy information, premiums, taxes, premium split methodology, and payments.