7.5 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” 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	2012	2011
Actual tax for the year under review	255,566	191,911
Actual tax for other periods	5,262	(124,812)
Deferred taxes due to temporary differences	99,670	42,515
Deferred taxes from loss carry-forwards	10,700	(43,830)
Change in deferred taxes due to changes in tax rates	(2,969)	(324)
Total	368,229	65,460

Domestic/foreign breakdown of recognised tax expenditure/income
in EUR thousand	2012	2011
Current taxes
Germany	164,362	8,045
Outside Germany	96,466	59,053
Deferred taxes
Germany	91,027	34,072
Outside Germany	16,374	(35,710)
Total	368,229	65,460

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	2012	2011
¹ Thereof on tax loss carry-forwards: -EUR 43,228 thousand (-EUR 42,760 thousand) ² Including reinsurance recoverables on benefit reserve; previous year was adjusted pursuant to IAS 1 in an amount of EUR 38,174 thousand charged to the other technical provisions.
Deferred tax assets
Tax loss carry-forwards	68,393	81,178
Loss and loss adjustment expense reserves	285,396	271,615
Benefit reserve	76,508	54,846
Other technical/non-technical provisions	174,094	216,240
Funds withheld	513,357	586,554
Deferred acquisition costs	22,671	14,073
Accounts receivable/reinsurance payable	3,809	7,156
Valuation differences relating to investments	22,857	19,210
Contract deposits	8,876	5,230
Other valuation differences	51,447	64,927
Value adjustments¹	(43,228)	(43,203)
Total	1,184,180	1,277,826
Deferred tax liabilities
Loss and loss adjustment expense reserves	24,797	22,542
Benefit reserve²	526,348	553,381
Other technical/non-technical provisions	52,805	87,485
Equalisation reserve	1,040,561	933,711
Funds withheld	27,961	39,951
Deferred acquisition costs	342,640	372,436
Accounts receivable/reinsurance payable	79,811	62,800
Valuation differences relating to investments	381,555	174,914
Present value of future profits on acquired life reinsurance portfolios (PVFP)	11,513	11,873
Other valuation differences	48,069	59,110
Total	2,536,060	2,318,203
Deferred tax liabilities	1,351,880	1,040,377

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	2012	2011
Deferred tax assets	620,493	682,888
Deferred tax liabilities	1,972,373	1,723,265
Net deferred tax liabilities	1,351,880	1,040,377

The actual and deferred taxes recognised directly in shareholders’ equity in the financial year increased by -EUR 174.5 million to -EUR 207.3 million (-EUR 32.8 million) against the backdrop of unrealised gains and losses on investments.

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	2012	2011
Profit before income taxes	1,301,952	742,248
Expected tax rate	32%	32%
Expected expense for income taxes	416,625	237,519
Change in deferred tax rates	(2,969)	(324)
Taxation differences affecting subsidiaries	(85,664)	(37,199)
Non-deductible expenses	67,002	56,022
Tax-exempt income	(26,747)	(66,664)
Tax income not attributable to the reporting period	3,788	(127,547)
Other	(3,806)	3,653
Actual expense for income taxes	368,229	65,460

The tax burden in the 2012 financial year rose sharply year-on-year by EUR 302.8 million to EUR 368.2 million (EUR 65.5 million). The increase can be attributed partly to a higher pre-tax profit in the year under review and partly to tax refunds in the previous year based on a decision of the Federal Fiscal Court (BFH) from 2010 regarding the taxation of investment income generated by the Group’s reinsurance subsidiaries domiciled in Ireland as foreign-sourced income. The tax ratio amounted to 28.3% (8.8%).

Availability of non-capitalised loss carry-forwards

Unused tax loss carry-forwards of EUR 233.7 million (EUR 286.9 million) existed as at the balance sheet date. Making allowance for local tax rates, EUR 152.4 million (EUR 151.5 million) thereof was not capitalised since realisation is not sufficiently certain.

No deferred taxes were established on assets-side taxable temporary differences amounting to EUR 107.5 million (EUR 38.9 million) and liabilities-side temporary differences of EUR 70.7 million (EUR 108.2 million) in connection with interests in Group companies because the Hannover Re Group can control their reversal and will not reverse them in the foreseeable future.

Availability of loss carry-forwards 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	–	1,431	–	150,980	152,411
Total	–	1,431	–	150,980	152,411