On 25 January, the “III Technical Workshop on Unit-Linked Insurance” took place at the Hotel Villa Magna in Madrid, organised by Varilo Insurance Broker and sponsored by Swiss Life, Utmost, and Cardif Lux Vie, among others.

Invited to speak by the organiser, Natalia Garzón Pacheco, partner responsible for the tax department at CORTÉS, ABOGADOS, delivered a paper entitled, “Insurance and the Gift Tax: Tax Ruling V0864-18” about the tax implications of Unit-Linked life insurance on the Inheritance and Gift Tax in the wake of the Spanish Tax Authorities’ recent pronouncement on binding Ruling V0864-18 of 28 March 2018.

Natalia Garzón stressed the importance of this Ruling for legal certainty in the tax treatment of Unit-Linked life insurance, insofar as it clearly establishes the essential elements of the tax, such as: the object burdened by the tax, the taxable event, and the moment when obligation to pay Inheritance and Gift Tax arises, allowing for interpretation on the other taxation precepts related to this tax.

The Ruling states that receipt of the policyholder’s survival benefit by the Unit-Linked life insurance beneficiary in a Mixed Life scheme—wherein the policyholder is distinct from the beneficiary, provided the latter is a natural person—is subject to Inheritance and Gift Tax, by constituting a net-worth increase obtained gratuitously by a natural person.

After determining the Unit-Linked insurance policy’s subjection to the Inheritance and Gift Tax, Natalia Garzón highlighted the following relevant aspects of the Ruling:

The Ruling holds that, for the specific type of insurance to which it refers, the taxable event, in accordance with 3.1. b) of the Spanish Inheritance and Gift Tax Act (Ley del Impuesto sobre Sucesiones y Donaciones), is the acquisition of goods and rights by donation (gift) or any other gratuitous, intervivos legal transaction, indicating that for the correct delimitation of the taxable event one must differentiate between the legal act or transaction that triggers the taxable event (in this case, the insurance contract) and the taxable event itself, which is the procurement of a net-worth increase obtained gratuitously by a natural person, and not the realization of the legal act or transaction that triggers the procurement of the aforementioned gratuitous net-worth increase, which will constitute the cause but not the levied taxable event.

Therefore, the Ruling clearly states that the taxable event is the act by which the beneficiary acquires the right to collect the amounts stipulated in the insurance contract that must be paid by the insurer.

By the same token, according to Garzón, the reference to the insurance contract in section 12 of the Inheritance and Gift Tax Regulation, in the non-exhaustive list of gratuitous, intervivos legal transactions contained therein, must be understood as the act by which the beneficiary acquires or receives the insurance benefits.

With regard to the legal completion of the act establishing the taxable event and accrual, the Ruling expressly states that the hypothesis analysed assumes the nature of the gift, relying on sections 618 and 623 of the Spanish Civil Code (Código Civil) that, when in connection with section 24 of the Spanish Inheritance and Gift Tax Act, warrant the conclusion that the act or contract determining the accrual of the Inheritance and Gift Tax—gift scheme when collecting on the survival benefit of a Unit-Linked policy, Mixed Life scheme when the policyholder or contracting party is not the beneficiary—will be the occurrence of the contingency that triggers the benefit.

The Ruling likewise clarifies that the beneficiary will not become a taxpayer until he/she accepts the benefit, at which point its effects become retroactive to the day on which the contingency occurred.

Natalia Garzón further underscored the utility of the Spanish Tax Authorities’ clarification of concepts as essential as those addressed, when, for example, correctly accepting the regional tax benefits for the Inheritance and Gift Tax established by certain Autonomous Communities in the exercise of their authority.

Seminar agenda

Cortés Abogados´presentation “Comments on the Enquiry DGT V0864-18”

Enquiry DGT V0864-18