Taxation mechanism offered in draft Tax Code to lead to lack of demand for life insurance, says LIOU president

Kyiv, June 23 (Interfax-Ukraine) – The mechanism for the taxation of insurance companies proposed in the draft Tax Code will lead to a fall in demand for life insurance services, the president of the League of Insurance Organizations of Ukraine (LIOU), Natalia Hudyma, said at a press conference at Interfax-Ukraine on Tuesday.

"[The new tax rules] mean that people have to loose 20% of the sum they pay to insurance companies and pay an additional 20% tax on investment income," she said.

Commenting on the taxation of insurance reserves, she said that insurance reserves are not taken into account as expenses during the calculation of insurers' profit for common taxation, so insurance reserves are taxed at the common rate, despite the fact that capitalization of insurance companies directly depends on the reserves accumulated, as the two notions are inseparably linked to each other.

"All over the world, insurance companies first form reserves for a certain period of time, later the companies pay, and finally after the reservation terms [expire], the funds are freed from the reserves and are taxed, as they become earned insurance premiums, while the payment of a 20% tax on insurance reserves foreseen in the Tax Code would lead to outflow of a lot of circulating funds, which in turn, would lead to a cut in the solvency of insurers and a lack of funds to cover insurance reserves," she said.

In addition, Hudyma said that the taxation of insurers and other commercial entities was unequal.

"All commercial entities are taxed as a single company, while insurers are taxed separately on financial and insurance activities, and with the said approach the losses from insurance activities would not be covered by the profit from financial activities, and insurers would always pay taxes irrespective of losses from insurance activities, as insurers would always have profits from financial activities," she said.

Hudyma added that there is no doubt that the national budget would receive UAH 1 billion in the form of taxes paid by insurance companies. However, she said that with a tough taxation system, the budget would receive the sum next year.

"Taking into account the hard situation, the league calls for the start of talks with the Finance Ministry and key authors of the draft code to discuss the said important issues," she said.