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 the remarks in section 3.2 “Summary of major accounting policies” regarding the basic approach to the recognition and measurement of deferred taxes.

An unchanged tax rate of 32.63% (rounded to 32.7%) was used to calculate the deferred taxes of the major domestic companies. It is arrived at from the corporate income tax rate of 15.0%, the German solidarity surcharge of 5.5% and a trade earnings tax rate of 16.8%. The Group tax rate consequently also amounts to 32.7% (32.7%). 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 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:

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

The deferred tax assets and deferred tax liabilities are shown according to their origin in the above table. Deferred taxes resulting from a single transaction and with respect to which the corresponding temporary valuation differences are simultaneously reversed were already netted on recognition. Further netting was made based on the timing of the reversal of temporary differences and other offsetting possibilities, ultimately resulting in the following disclosure of deferred tax assets and deferred tax liabilities in the balance sheet:

In view of the unrealised gains on investments and on currency translation recognised directly in equity in the financial year, actual and deferred tax expenditure – including amounts attributable to non-controlling interests – of EUR 61.8 million (EUR 4.8 million) was also recognised directly in 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.

The expense for income taxes in the financial year was EUR 143.2 million lower than in the previous year at EUR 248.0 million (EUR 391.2 million). In addition to the lower pre-tax profit compared to the previous year, this was due among other things to changes in future applicable local tax rates in the United States and France and the associated remeasurement of deferred tax liabilities.

The effective tax rate amounted to 19.2% (24.2%).

Availability of non-capitalised loss carry-forwards

Unused tax loss carry-forwards, deductible temporary differences and tax credits of EUR 601.2 million (EUR 459.4 million) existed as at the balance sheet date. Making allowance for local tax rates, EUR 367.3 million (EUR 109.7 million) thereof was not capitalised since realisation is not sufficiently certain.

The assets-side unadjusted deferred taxes on loss carry- forwards and tax credits amounting to EUR 55.1 million (EUR 83.3 million) will probably be realised in an amount of EUR 15.5 million (EUR 17.6 million) within one year and in an amount of EUR 39.6 million (EUR 65.7 million) in the subsequent years.

In the year under review the actual taxes on income were reduced by EUR 5.2 million (EUR 0.5 million) because loss carry-forwards were used for which no deferred tax assets were established.

The write-down of deferred tax assets recognised in previous years resulted in a deferred tax expense of EUR 10.1 million (EUR 0.7 million) in the year under review. This is not opposed by any deferred tax income (EUR 18.1 million) from the reversal of earlier write-downs.

Excess deferred tax assets are recognised with respect to losses in the year under review or in the previous year only to the extent that, based on strong evidence, it is likely that the company concerned will generate sufficiently positive taxable results in the future. This evidence was provided for deferred tax assets of EUR 23.0 million (EUR 25.8 million).

No deferred taxes were established on liabilities-side taxable temporary differences amounting to EUR 50.6 million (EUR 40.2 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: