Civil Cassation Section, 13/05/2025, no. 12714: Qualifying reinsurance contracts in light of the regime governing deposits and commissions

The ruling in this case relates to a tax assessment referring to reinsurance treaties.

The company in question reinsured its portfolio of unit-linked policies. As is often the case, the premiums due to the reinsurer were retained in the form of a deposit with the cedant (known as funds withheld).

Deposits are usually set up to guarantee the reinsurer's commitment to contribute to settling claims (or providing benefits in life insurance) for the portion of risk ceded to it.

Since the deposits earn interest, which increases the deposit itself, the company treated these amounts as interest expense, deductible for IRES and IRAP purposes.

The Italian Revenue Agency – Lombardy Regional Directorate thought that the interest shouldn't have been considered remuneration for the deposit itself (ie the premiums remaining at the disposal of the reinsured). But rather it should have been remuneration for the financial activity carried out by the reinsurer through financing pre-calculated commissions.

Pre-calculated commissions are used to remunerate the distribution network in relation to the payments that the insured will make throughout the policy period. They represent a certain cost (advance payment of future commissions) against an uncertain revenue (collecting periodic/recurring premiums after the initial premium).

The Agency re-taxed the amount of approximately EUR6 million for interest expense deemed non-deductible for IRAP purposes.

The company first appealed and then took the case to the Court of Cassation. It pointed out the insurance nature of the underlying policies, given the company's obligation to pay the insured value to the beneficiaries when an event relating to human life (death or life event) occurred. So there was a demographic risk associated with the policies.

The company considered that the Regional Tax Commission had incorrectly assessed the nature of the reinsurance treaties based on the characteristics of the underlying unit-linked policies, excluding the (re)insurance cause and not considering the additional risks assumed by the reinsurers.

The tax reassessment carried out by the Office, and confirmed by the Regional Court, was based on denying the insurance nature of the reinsurance contracts concluded by the taxpayer company, given the presumed nature of the linked policies that were the subject matter of the contracts as investment contracts. And it was also based on the financial and non-insurance purpose, connected with the financing of the cost represented by the “pre-calculated” commissions, which the contracts referred to as reinsurance.

The Court of Cassation considered this assessment by the Revenue Agency and the Tax Commission (regional, most recently) to be correct.

The insurance and risk component linked to the event of death is, according to the Court of Cassation, entirely minor. And the financial component of the contracts themselves prevails, excluding the nature of remuneration of the sums paid to establish reinsurance deposits, which must be classified as interest.

The Regional Tax Commission, with an unquestionable assessment of legitimacy, determined that the real purpose of the insurance and reinsurance contracts in question was financial and not insurance-related. This was because the capital to be paid at the contractually agreed maturity date was determined on the basis of the investment made by the policyholder, who paid the company the premiums that it was supposed to invest in its own fund.

The sums deposited with the reinsured companies after the formal transfer of risk through reinsurance treaties were calculated as equal to the NAV, ie the value of the investment made by the insured, and not in relation to the “demographic risk.” This risk existed only to a minimal extent of 2.5%, ie in the NAV surcharge provided for in the contract in the event of the policyholder's premature death.

The contributing company hadn’t transferred only 2.5% of the NAV to the reinsurers, but the entire amount, so also the predominant component corresponding to the investment contract, which didn’t entail any risk for either the company or the reinsurance companies, as the risk of total or partial loss of the linked investment remained entirely with the insured.

Nor could there be any transfer of risk with regard to the pre-calculated commissions, which the reinsurance companies advanced to the cedant, thereby financing it.

The risk that the pre-calculated commissions wouldn’t be reimbursed due to the death of the policyholder before the expiry of the contract or due to the contract being redeemed early constitutes a normal form of risk in the financing contract, ie the risk of total or partial non-fulfilment by the borrower of its repayment obligation. This is a purely contingent risk, and certainly not a qualifying risk for reinsurance contracts, which were entered into on the assumption that the pre-calculated commissions could be recovered by the reinsurers, who had advanced them through interest on NAV deposits.

Beyond the tax aspects, the ruling is interesting both because it addresses the nature of linked policies, seen for the first time from the reinsurer's perspective, and because rulings on reinsurance are generally quite rare – even more so those that analyse the nature and characteristics of reinsurance contracts, in particular individual clauses or specific aspects.