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On June 6, 2025, the Ghent Court delivered an interesting decision regarding the transfer pricing treatment of captive reinsurance structures.
The case revolves around the potential provision of abnormal or gratuitous benefits by a Belgian company to a captive entity within its corporate group.
Specifically, a Belgian company, referred to as “NV X,” leads a diverse group of companies, both domestic and international entities, alongside another principal entity. Certain risks associated with the group are insured by NV X through external insurers, who subsequently reinsure these risks with a Swiss reinsurer, “CH AG”, a captive reinsurance company. This captive reinsurer is integral to the group, managing risks across over 40 jurisdictions, encompassing areas such as pollution, cyber risk, and credit insurance.
The Belgian tax administration contended that CH AG merely performs an administrative function, lacking the substantive role of a true reinsurer. They argued that the arrangement and premiums paid constituted an abnormal and gratuitous benefit granted (as per Article 26 Belgian income tax code).
The main arguments of the tax administration included:
- Lack of Diversification: CH AG only reinsures intra-group risks, leading to a loss of synergy benefits and resulting in premiums that are not at arm's length.
- Intercompany Investments: A significant portion of CH AG's assets is invested within the group, indicating a non-diversified investment strategy.
- Outsourced Management: CH AG lacks personnel, with critical management functions outsourced to third parties.
- Limited Control: The board of directors of CH AG does not oversee risk management; operational decisions rest with the group principals.
- Financial Capacity Concerns: The administration claimed that CH AG's financial capacity was insufficient, suggesting that an independent insurer would not select CH AG.
The court found that the Belgian tax authorities failed to substantiate their claim that CH AG merely performed administrative support, mainly focusing on the burden of proof that remains with the tax authority to demonstrate that the premiums paid were not at arm’s length.
While the court's decision favored the taxpayer, the court decision provides valuable insights for stakeholders with similar reinsurance arrangements. Taxpayers should be well-prepared to support their captive arrangements and properly document them.
Feel free to contact us to discuss the court decision in more detail.