With its decision n. 5608 of December 10, 2018 the Italian Provincial Tax Court of Milan ruled against the (ab)use of so called “unit linked” life insurance policies for tax avoidance purposes.
The decision of the tax court refers to the latest rulings of the Supreme Court on the matter and represents a significant step towards a more decisive step towards a crack-down on a potentially abusive tax practice.
Under Italian tax law, in case of cash value life insurance policies a taxpayer is allowed to defer the payment of the tax on the increase in value of the policy until the payment of the value of the policy to the beneficiaries, upon the death of the policyholder, or to the policyholder, upon the expiration or surrender of the contract. At that time, the difference between what the taxpayer gets back and what he or she paid by way of insurance premiums is taxed as income from capital, with a fixed-rate 26 percent tax withheld directly by the issuer.
A Unit-Linked Insurance Policy is a combination of a life insurance and an investment vehicle. A portion of the premium paid by the policyholder is utilized to provide insurance coverage to the policyholder and the remaining portion is invested in equity and debt instruments. The aggregate premiums collected by the insurance company providing such insurance is pooled and invested in varying proportions of debt and equity securities in a similar manner to mutual funds. Each policyholder has the option to select a personalized investment mix based on his/her investment needs and risk appetite. Like mutual funds, each policyholder’s Unit-Linked Insurance Plan holds a certain number of fund units, each of which has a net asset value that is declared on a daily basis and varies based on market conditions and performance of the plan’s underlying investments. A portion of premium goes towards mortality charges i.e. providing life cover. The remaining portion gets invested funds of policyholder’s choice. Invested funds continue to earn market linked returns.
The Tax Court referred to the Supreme Court’s ruling n. 10333 of 2018 which upheld the decision of the Appellate Court of Milan n. 220 or 2016.
According to ruling n. 1033, in the absence of some required traits of a typical permanent life insurance policy, such as the guarantee of the payment of the principal amount of premiums upon termination of the contract and the assumption by the issuer of risk of death of the policyholder (demographic risk), the contract should be treated as an investment plan (i.e. a mutual fund) and the taxpayer should be taxed currently on the income arising from the insurance policy’s underlying investments.
Under the facts of the case, the policyholder (a well known professional soccer player) underwrote an investment plan labelled as life insurance policy and issued by a foreign company, which gave him the unlimited right to make withdrawals from or payments to the insurance plan, during the course of the contract, and the power to direct and manage the investment of the underlying assets, while the issuer’s only obligation was that of paying an amount equal to the net asset value of the underlying investments at the time of the policyholder’s death or the contractual termination of the policy.
The tax court treated the contract as a financial investment, applied the imputed rate of return provided for under article 6 of Law Decree n. 167 of 1990 (in the absence of a taxpayer’s of the actual amount of income generated by the underlying investments), and assessed a tax of euro 64,004 plus interest and a penalty in the amount of euro 76,804.80.
Italian taxpayers should consider different strategies to obtain the benefits of deferral of tax on income arising from their financial investments, such as the use of nonresident discretionary or support trusts properly planned and designed to provide adequate protection of the invested capital and desired benefits in case of death or upon retirement.
A link to the Tax Court’s decision is provided below:
CTP 10-12-2018 n. 5608)