Three model interpretations of PAL tax assets under Solvency II: 🔹 Model 1: Hybrid Model – DTA + receivable PAL tax assets are treated as fully loss-absorbing because they either reduce future tax payments or are refunded in cash. → Effect: always full value included in LAC DT, regardless of future profits. But in line with what actually happens in reality. → Regulatory concern: This model bypasses Article 207(2) and 15(3), since it ignores the requirement for probable future taxable profits. Solvency II does not permit hybrid instruments. This model undermines harmonisation and equal treatment across EU undertakings. 🔹 Model 2: DTA-only Model PAL tax assets are treated as deferred tax assets and included in LAC DT only to the extent that future taxable profits can be demonstrated. The 5-year refund is ignored for LAC DT purposes. → Effect: Only the part supported by robust future profit projections can be included. → Regulatory compatibility: Fully aligned with Article 207 and 15(3), and ensures equal treatment of tax regimes under Solvency II. 🔹 Model 3: Receivable-only Model PAL tax assets are classified as unconditional receivables. → Effect: The assets are included in the Solvency II balance sheet (Tier 1), but not as LAC DT. → Regulatory support: In line with Finanstilsynet’s Q&A (2018), which considers these items receivables, not DTAs. Consistent with the principle that only deferred tax assets — not receivables — are loss-absorbing under Article 207. Creates and unfavorable SCR treatment compared to other companies, which pay the regular company tax.

Pursuant to Article 207 of Delegated Regulation (EU) 2015/35 (DR), the loss-absorbing capacity of deferred taxes considers only the change in value of deferred tax assets or liabilities. Article 15 DR requires that insurance and reinsurance undertakings recognise and value deferred taxes in relation to all assets and liabilities, including technical provisions, that are recognised for solvency or tax purposes in accordance with Article 9 DR. According to IAS 12 paragraph 5, deferred tax assets are the amounts of income taxes recoverable in future periods in respect of deductible temporary differences, carryforward of unused tax losses and carryforward of unused tax credits. The same sources of DTA are mentioned in Article 15(2) DR.

The mechanism of the tax regime described in the question does not lead to a temporary difference between the valuation for tax purposes and for Solvency II purposes, but in years with negative return it leads to the creation of a tax credit. The treatment of this tax credit in Solvency II, for instance if it corresponds to a deferred tax asset or to a receivable, depends on the interpretation of IAS 12 (or of the applicable accounting framework if the derogations in Article 9 (4) apply). According to Article 9 DR, assets and liabilities are recognised in conformity with the international accounting standards (IAS), provided that these do not conflict with the valuation approach set out in Article 75 of Directive 2009/138/EC.  Article 9 (4) allows the use of other accounting frameworks under certain conditions.

Considering that the matter relates to the interpretation and application of IFRS/accounting framework, it falls outside EIOPA's mandate. As such, EIOPA cannot take a position as regards the recognition of the item, besides that in case it is recognised as a deferred tax asset, the loss-absorbing-capacity of deferred taxes in accordance with Article 207 DR applies.