French Tax Change Could Lower Credit Rating

September 7, 2010 Taxation in France

François FillonFrance has been warned that if it carries out proposed changes to the tax treatment of life insurance products, the country could face a national credit rating downgrade across the insurance sector.

The international credit rating agency Moody’s issued a statement on September 6th warning France that the recently proposed tax rate change on life insurance products could have a significant effect on consumer behavior, leading to lower insurance industry profits and increased risk.

Last week Francois Fillon, French Prime Minister, revealed plans to instate a new tax on selected portions of multi-support life insurance products, which allow policyholders to invest part of their paid premiums into a guaranteed product and the rest into a product whose value is based on an underlying asset. Currently, the guaranteed aspect of the insurance policy only draws a tax liability at the end of its cycle. However, under Francois Fillon’s proposal, any gains realized by the guaranteed product would be taxed annually. Additionally, the Prime Minister suggested that sales revenues on health insurance products would attract a new 3.5 percent tax, and a once-off 10 percent charge on capitalization reserves. According to the French Finance Ministry, the combined measures could raise annual tax revenues by approximately EUR 3.2 billion.

Multi-support life insurance products have proven to be a popular savings mechanism in France due to their historically favorable tax treatment and relative security. However, according to Moody’s, the new tax would lower the attractiveness of the product and quickly lead to a shift in savings and insurance preferences. Historically, unit-linked products operated on higher profit margins for insurers than traditional life policies, and the changes could potentially lead to significant profit decreases across the entire insurance sector, along with potential credit downgrades.

Photo by apesphere