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
1 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