By Sara Sousa Rebolo and Diogo Silva Melo
The unit-linked life insurance is commonly used not just for protection purposes but also as an investment. It contrasts, due to its characteristics in terms of risk and return, with traditional capitalization insurance, which is associated only with the constitution of guaranteed capital savings, through regular payments.
The unit-linked insurance is a financial insurance linked to investment funds or other financial assets (shares, bonds, commodities such as precious metals, cereals or oil, exchange rates or interest rates) and falls under the "life insurance" category, considering it is associated with a single-premium life policy or mixed insurance that covers the life of an individual and appoints certain beneficiaries in the event of death.
By being associated with funds and financial assets the unit-linked are characterized by variable capital, although a portion of the capital may be guaranteed in case of death of the policyholder and therefore in such cases there is risk sharing between the insurer and the policyholder.
According to the Insurance and Pension Funds Sector Report 2020, there has been a progressive and significant concentration of Insurers in the production of these insurance linked to investment funds. The reasons that explain this investment have to do with the desire to provide answers in terms of flexibility, diversification, patrimonial and succession planning, as well as the tax efficiency that is associated with them.
How this insurance can be beneficial for foreign investors
From a wealth planning perspective, unit-linked insurance allows the policyholder to organize the transfer of his assets (since he can choose to make his contribution in cash or in kind, i.e., by transferring assets he already owns) in accordance with customized clauses, which can be changed at any time during the term of the policy, in addition to also allowing family corporate structures the possibility of investing in traditional and/or complex financial products.
On the other hand, at the inheritance level, beneficiaries are exempted from the payment of stamp duty (10%), regardless of the family relationship between the deceased policyholder and the beneficiary heirs.
According to Portuguese tax law, tax residents in Portugal are subject to Personal Income Tax (IRS) on their worldwide income and are required to declare the existence and identification of deposit accounts or securities accounts opened with a financial institution not resident in Portugal or with a branch located outside Portuguese territory of which they are holders or beneficiaries.
In the specific case of life insurance, from a Portuguese tax perspective, income derived from the redemption of a life insurance contract is classified as capital income (Category E) for IRS purposes, i.e., the positive difference between the amount earned at the time of surrender and the amount/premium invested by the taxpayer in the same insurance contract, and is therefore subject to taxation.
However, unit-linked insurance offers its holders tax advantages by allowing total tax deferral on the gain until the time of redemption (partial or total, which may be chosen by the policyholder) and decreasing taxation with regard to the gains made at the time of redemption of the policy - if the amount of premiums paid in the first half of the contracts represents at least 35% or more of the total premiums paid, there is room for reduced taxation: until the 5th year the redemption is subject to the tax rate of the policyholder. From year 5 and a day to year 8 the surrender is subject to a rate of 22,4%, and from year 8 and a day the surrender is subject to a rate of 11,2%.
The benefits for Non-Habitual Residents in Portugal
With the tax regime for Non-Habitual Residents (NHR) and the various tax benefits, particularly with regard to investment income from foreign sources, the solution of unit-linked insurance contracted abroad becomes even more attractive.
By way of example, interest and dividends with a Luxembourg source earned by an NHR may be exempted from taxation in Portugal under the tax legal framework and in accordance with the Double Taxation Agreement (DTA) between the two countries. However, not all foreign income under the NHR status is exempted, such as capital gains which are taxed at 28%.
In the case of Luxembourg unit-linked insurance in particular, it is important to note that Luxembourg law has given it tax neutrality with respect to non-residents, by not taxing the premiums or capital gains at the time of surrender or termination, nor the capital on the death of the policyholder, determining that the country competent to tax these gains is the country of residence, in this case Portugal, and thus we return to the 28% to 11,2% rates mentioned above.
Why the interest in Luxembourg unit-linked insurance under the NHR legal framework?
Under the framework of the NHR, interest and dividends received by an NHR from a foreign source may be exempted from taxation in Portugal. Consequently, and adopting an understanding that is not without risk or discussion, it is possible to conclude that income obtained with the surrender of a life insurance contract corresponds to interest calculated on the capital invested during the same and may, as such, be so declared and framed in Portugal in order to benefit from the exemption granted by the NHR regime, notwithstanding the qualification given and the specific case.
On the other hand, policies issued by Luxembourg insurers may invest without restrictions (or limited restrictions) in complex financial products and make alternative investments such as unlisted assets, hedge funds, derivatives and non-harmonized funds.
Added to this broader and more diversified range of investments is the asset protection system that applies to Luxembourg Insurers (total segregation of the assets associated with insurance policies from those held by the Insurer and the Custodian Bank - the so-called Luxembourg Security Triangle) which ensures that the assets linked to unit-linked insurance policies are protected for the benefit of policyholders in the event of financial instability on the part of the Insurer or the Custodian Bank.
It is this framework that has made the unit-linked life insurance contract especially attractive also for holders of residences under the Golden Visa program, which, as we know, is aimed at individual investors from third states and allows them and their family mobility within the Schengen area and access to European citizenship, without significant periods of residence, which can be accumulated with the NHR program for tax optimization and asset security.
The analysis of the fiscal impact and of the migratory procedures should always be considered on a case-by-case basis in order to obtain the best and most appropriate legal framework to the needs and objectives of the individual and his/her asset structure.
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