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6.5 Taxes on income

Domestic taxes on income, comparable taxes on income at foreign subsidiaries as well as deferred taxes in accordance with IAS 12 “Income Taxes” and deferred tax assets and liabilities are recognised under this item.

The reader is referred to Section 3.2 “Summary of major accounting policies” regarding the basic approach to the recognition and measurement of deferred taxes.

The tax rate used to calculate the deferred taxes of the domestic companies was unchanged from the previous year at 31.93% (rounded to 32%). It is arrived at from the corporate income tax rate of 15.0%, the German reunification charge of 5.5% and a uniform trade earnings tax rate of 16.1%. The deferred taxes at the companies abroad were calculated using the applicable country-specific tax rates.

Tax-relevant bookings on the Group level are made using the Group tax rate of 32% unless they refer specifically to individual companies.

Deferred tax liabilities on profit distributions of significant affiliated companies are established in the year when they are received.

Breakdown of taxes on income

The breakdown of actual and deferred income taxes was as follows:

Income tax in EUR thousand 2011 2010
Actual tax for the year under review 191,911 307,519
Actual tax for other periods (124,812) (52,498)
Deferred taxes due to temporary differences 42,515 (2,792)
Deferred taxes from loss carry-forwards (43,830) 6,299
Change in deferred taxes due to changes in tax rates (324) (899)
Total 65,460 257,629
Domestic/foreign breakdown of recognised tax expenditure/income in EUR thousand
  2011 2010
Current taxes    
Germany 8,045 198,204
Outside Germany 59,053 56,817
Deferred taxes    
Germany 34,072 (22,189)
Outside Germany (35,710) 24,797
Total 65,460 257,629

The following table presents a breakdown of the deferred tax assets and liabilities into the balance sheet items from which they are derived.

Deferred tax assets and deferred tax liabilities of all Group companies in EUR thousand
  2011 2010
Thereof on tax loss carry-forwards: –EUR 42,760 thousand (–EUR 43,787 thousand)
Deferred tax assets    
Tax loss carry-forwards 81,178 45,433
Loss and loss adjustment expense reserves 271,615 201,132
Benefit reserve 54,846 36,148
Other technical/non-technical provisions 216,240 170,844
Funds withheld 586,554 308,411
Accounts receivable/reinsurance payable 7,156 6,243
Valuation differences relating to investments 19,210 14,517
Contract deposits 5,230 84
Other valuation differences 79,000 278,904
Value adjustments1 (43,203) (44,377)
Total 1,277,826 1,017,339
Deferred tax liabilities    
Loss and loss adjustment expense reserves 22,542 13,228
Benefit reserve 515,207 190,521
Other technical/non-technical provisions 125,659 95,284
Equalisation reserve 933,711 802,480
Funds withheld 39,951 51,402
Deferred acquisition costs 372,436 363,468
Accounts receivable/reinsurance payable 62,800 53,593
Valuation differences relating to investments 174,914 183,523
Present value of future profits on acquired life reinsurance portfolios (PVFP) 11,873 12,155
Other valuation differences 59,110 262,076
Total 2,318,203 2,027,730
Deferred tax liabilities 1,040,377 1,010,391

The deferred tax assets and deferred tax liabilities are shown unoffset in the above table. The deferred taxes are recognised as follows in the balance sheet after appropriate netting:

Netting of deferred tax assets and deferred tax liabilities in EUR thousand 2011 2010
Deferred tax assets 682,888 622,136
Deferred tax liabilities 1,723,265 1,632,527
Net deferred tax liabilities 1,040,377 1,010,391

The actual and deferred taxes recognised directly in shareholders’ equity in the financial year amounted to –EUR 36.4 million (–EUR 37.5 million). They resulted from items that were charged or credited directly to equity.

The following table presents a reconciliation of the expected expense for income taxes with the actual expense for income taxes reported in the statement of income. The pre-tax result is multiplied by the Group tax rate in order to calculate the Group’s expected expense for income taxes.

Reconciliation of the expected expense for income taxes with the actual expense
in EUR thousand
2011 2010
Profit before income taxes 742,248 1,088,534
Expected tax rate 32% 32%
Expected expense for income taxes 237,519 348,331
Change in deferred tax rates (324) (899)
Taxation differences affecting foreign subsidiaries (37,199) (54,112)
Non-deductible expenses 56,022 9,777
Tax-exempt income (66,664) (14,174)
Tax income not attributable to the reporting period (127,547) (54,026)
Other 3,653 22,732
Actual expense for income taxes 65,460 257,629

On the basis of a decision of the Federal Fiscal Court (BFH) from the previous year regarding the taxation of investment income generated by the Group’s reinsurance subsidiaries domiciled in Ireland as foreign-sourced income pursuant to the Foreign Transactions Tax Act, taxes already paid for earlier years were in large measure refunded in the first quarter of the year under review. Assessments regarding the taxation of foreign-sourced income for the companies Hannover Reinsurance (Ireland) Ltd. and Hannover Life Reassurance (Ireland) Ltd. were rendered immaterial by cancellation notices dated 8 February 2011 and 31 March 2011 respectively. Subsequent assessment notices regarding corporation tax were issued for Hannover Re and E+S Rück in the year under review. The trade tax effects were offset in the third quarter of 2011 by the controlling company HDI Haftpflichtverband der Deutschen Industrie V.a.G. In total, the refund of taxes and interest resulted in an improvement of EUR 128.0 million in Group net income in the year under review.

Availability of non-capitalised loss carry-forwards

Unused tax loss carry-forwards of EUR 286.9 million (EUR 161.9 million) existed as at the balance sheet date. Making allowance for local tax rates, EUR 151.5 million (EUR 156.5 million) thereof was not capitalised since realisation is not sufficiently certain.

In addition, tax credits of EUR 4.4 million (EUR 5.9 million) which were not capitalised are still available. There were no other temporary differences which had not been capitalised (previous year: none).

No deferred taxes were established on taxable temporary differences in connection with interests in Group companies amounting to EUR 73.2 million (EUR 50.7 million) because the Hannover Re Group can control their reversal and will not reverse them in the foreseeable future.

Availability of loss carry-forwards and tax credits that have not been capitalised:

Expiry of non-capitalised loss carry-forwards in EUR thousand
  One to
five years
Six to
ten years
More than
ten years
Unlimited Total
Loss carry-forwards 3,527 147,937 151,464
Tax credits 4,425 4,425
Total 7,952 147,937 155,889


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