Moody’s Sees “Positive Impact” from Proposed German Tax Reforms

October 31, 2003

Moody’s Investors Service has issued a bulletin stating that “Germany’s proposed decision to reform the taxation of German life & health insurers would have a significant and timely positive impact on the sector overall, given the current difficult situation faced by many companies.”

The rating agency issued the comment “in response to the agreement reached by the lower chamber of the German parliament (Bundestag) on 17 October 2003 to reverse elements of a tax reform introduced in 2000 that removed capital gains and losses from the calculation of tax liabilities. Under the new proposal, effective from 1 January 2004, life & health insurers would again be taxed on capital gains, but would be able to deduct investment losses from taxable income. Companies would also have the option to apply the new tax regime retrospectively for 2003.”

It also noted that the proposals, which still need the approval of the Bundesrat, Germany’s Upper House, would also include mutual funds.

“In Moody’s view, the proposed reformed taxation system would particularly benefit the numerous insurance companies with hidden capital losses carried forwards from 2002 (worth around EUR15 billion in total [around $17.5 billion]), which, as a result of the likely need to write down the majority of these losses during 2003, are exerting significant pressure on statutory solvency this year,” said the announcement. “Moreover, under the existing system, companies would also face significantly higher levels of tax liabilities, adding further pressure to balance sheets.”

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