GIM7290 - Equalisation reserves: the tax rules: insurers not regulated in the UK: non-statutory reserves: tax relief for UK branches of EEA insurers

Regulation 7 of the tax regulations provides that a UK branch of an EEA insurer will be entitled to the same amount of tax relief as if it were regulated in the UK on sums which the company actually sets aside. These are called 'equivalent reserves'. But tax relief will only be available if

the UK branch:

• submits a branch balance sheet to the Inland Revenue
• creates and maintains an equalisation reserve in that balance sheet
• calculates transfers into and out of the reserve under the UK rules as applied to the branch business, and
• the company’s main balance sheet either contains an equalisation reserve at least equal in amount to the UK branch reserve; or, if the UK branch reserve exceeds the world-wide equalisation reserve shown as such in the main balance sheet, shows the excess otherwise than as funds belonging to or available for distribution to the proprietors of the company.

The purpose of this alternative test is to avoid discriminating against foreign companies which have genuinely set aside an amount at least equal to the reserve shown in the branch balance sheet, but which may be prevented by EC or local accounting rules from showing this as an equalisation reserve in their published accounts. Inspectors should, therefore, normally accept that it is satisfied provided that the company balance sheet contains an identifiable amount (of sufficient size) that is prima facie non-distributable.

If any of these criteria are not met in any year no tax deduction may be given for transfers into the reserve in that year. Further, if there is an existing equalisation reserve the whole of the balance of the reserve must be brought back into charge for tax purposes at the end of that year. If in a later year the branch wished to claim tax relief, it would be treated in the same way as a new UK branch, and reserves must be built up from scratch.