Loss-Absorbing Capacity of Deferred Taxes

Overview

This calculator implements the Loss-Absorbing Capacity of Deferred Taxes (LAC DT) amount within the Solvency II standard formula.^[1] It calculates LAC DT from the Article 207 loss base, the resulting tax relief, and the recoverable deferred-tax capacity. LAC DT is one part of the Article 108 / Article 205 SCR adjustment for the loss-absorbing capacity of technical provisions and deferred taxes.^[2][3]

Input Terms

• Gross BSCR: The Basic Solvency Capital Requirement before the deferred-tax adjustment.^[1]
• Positive LAC TP Capacity Amount: The positive LAC TP amount from Article 206. It reduces the Article 207 loss base because the regulatory adjustment for LAC TP is a signed negative amount.^[4][1]
• Operational Risk: The Article 204 operational risk charge included in the Article 207 loss base.
• Net Deferred Tax Liabilities: Deferred tax liabilities that can decrease after the instantaneous Article 207 loss.
• Tax Loss Carryback Capacity: Recoverable tax capacity from carrying the post-loss tax effect back against eligible prior taxable profit.
• Probable Future Taxable Profits: Future taxable profits that can support deferred tax asset recognition when the Article 207 evidence conditions are met.
• Future Taxable Profit Evidence Flag (0/1): Evidence gate for using probable future taxable profits in recoverable tax capacity.
• Post-Loss Assumptions Not More Favourable Flag (0/1): Evidence gate confirming that future-profit assumptions are not more favourable than the assumptions used for deferred tax asset valuation and utilisation.
• Business Plan Horizon Flag (0/1): Evidence gate confirming that projected future taxable profits respect the business-plan horizon and Article 207 projection limits.
• Corporate Tax Rate: The corporate tax rate applicable to the undertaking's tax-loss relief calculation.

Technical Rationale

LAC DT recognizes that the instantaneous standard-formula loss can reduce deferred tax liabilities or create recoverable tax effects. The calculator forms the loss base from Gross BSCR - Positive LAC TP Capacity Amount + Operational Risk, applies the Corporate Tax Rate, then limits the recognized amount to recoverable deferred-tax capacity.^[1]

Recoverable deferred-tax capacity is built from Net Deferred Tax Liabilities, Tax Loss Carryback Capacity, and recognized Probable Future Taxable Profits. Future taxable profits are recognized only when all three evidence flags pass, so prepared tax-capacity inputs remain visible without turning the calculator into a full tax projection model.^[1]

Important Notes

• Positive LAC TP convention: The input is the positive LAC TP capacity amount. It is subtracted in the LAC DT loss base to reflect the signed Article 206 adjustment.
• Recoverability: Future taxable profits can support the LAC DT amount only when the undertaking can evidence that the profits are probable under the Article 207 post-loss conditions.
• Article 207 evidence gate: Probable Future Taxable Profits are recognized only when the future-profit evidence, post-loss assumption, and business-plan horizon flags all pass. Net Deferred Tax Liabilities and Tax Loss Carryback Capacity remain visible separately in the recoverable-capacity bridge.
• Post-2015 Article 207 update: Commission Delegated Regulation (EU) 2019/981 amended Article 207 from 1 January 2020 by adding more explicit deferred-tax recoverability and future taxable-profit evidence conditions.
• Regulatory deviation: Material deviation from standard-formula assumptions at this layer may support a capital add-on or a move toward an internal model where justified.^[5]
• Reporting: The displayed result is intended to support the corresponding standard-formula component feeding the S.25.01.01 standard-formula reporting view.^[6]