Greater certainty about the taxation of unit-linked life insurance policies under Spanish Wealth Tax
The unit-linked life insurance plan is an investment vehicle where the policyholder subscribes the plan providing an amount of capital that covers both survival and/or death contingencies of the insured. The term unit-linked differentiates this product from traditional life insurance policies as, under unit-linked plans, the policyholder undertakes the financial risk of the investments. Its high level of customization together with its elevated costs makes it a vehicle that currently is only available for high net worth individuals.
Due to its complexity, there has been some hesitance about the taxation of this vehicle in Spain, particularly concerning Wealth Tax. One may think that, as with any other investment vehicle, the year-end value of the policy should be added to the taxable base of the Spanish Wealth Tax of the beneficiary.
However, in the last months the Spanish Directorate of General Taxation (DGT) has issued several binding rulings (CV 2616/2017 of October 5th or CV 993/2018 of April 17th, among others) in which, pursuant to Article 17 .One of Law 19/1991, understands that these vehicles, due to its consideration as life insurance policies, should be valued at their redemption value at the time of accrual of the tax. Therefore, the DGT infers that those unit-linked insurance policies with no redemption right until contingency occurs should not be included in the taxable base of the beneficiary’s Wealth Tax.
The said rulings provided a greater legal certainty with respect to the potential tax incentives of this product. In essence, the Spanish tax authorities are granting the tax treatment of a life insurance policy to what actually is considered a tailored-made long-term investment vehicle, reason why some voices already dubbed it as the “Spanish trust”.
Regarding Spanish Personal Income Tax, unit-linked life insurance plan enjoys the tax treatment of insurance policies, so the income obtained will be taxed as savings income, with a capped tax rate of 23%. In case of negative returns, these losses can be compensated with other savings income or capital gains, under certain limitations.
Finally, it should be noted that in practice, these policies are designed following the policyholder’s will, and there is a considerable flexibility with respect to most of the elements of the contract – duration, beneficiaries, risks, redemption right, rescission, extensions, return of capital – that prevents us to provide a general answer to the taxation of these vehicles, so the analysis shall be on a case-by-case basis.