594 Foreign life assurance and deferred annuities: taxation and returns

Summary

In general, for domestic life assurance policies, issued up until 31 December 2000, taxation investment in Ireland is based on 2 key concepts —

• no tax is charged at the level of the policyholder, that is, the original policyholder is not liable for capital gains tax on the proceeds from the life assurance policy;
• instead, the life assurance company is liable to tax every year on the income and gains arising from its investment of the policyholders’ premiums. (This is known as the “I – E” taxation regime.)

For policies issued on or after 1 January 2001 the investment return on premiums is allowed to grow tax free, and it is only when payments are made to policy holders that tax applies. This is known as “the gross-roll-up” taxation regime.

Section 594 provides, however, that the exemption from capital gains tax given under section 593 in respect of the proceeds of a life assurance policy or a deferred annuity contract received by the original policyholder does not apply in the case of a policy issued or a contract made on or after 20 May 1993 —

• where the insurer is not within the charge to Irish corporation tax, that is, it is not an Irish resident assurance company or a non-resident assurance company operating through a branch in the State, or
• where the policy or contract is issued or made by an International Financial Services Centre (IFSC) life assurance company and is made with or issued to, as the case may be, a person who did not continuously reside outside the State throughout the period of 6 months beginning on the date of issue or the date of contract, as the case may be. (The taxation regime for IFSC life companies has always been “gross-roll-up”.)

In contrast to the general rate of capital gains tax, the rate of tax applying in these circumstances is 40 per cent.

Thus, Irish residents taking up foreign life assurance policies or deferred annuity contracts on or after 20 May, 1993 are fully chargeable to capital gains tax on the profit of their investment or in respect of the growth in value of the policy from 20 March, 2001 where such a policy was taken out prior to 20 May, 1993. In addition, to match the regime of taxation at source which applies to life assurance policies issued in the State —

• the policyholders’ costs are not to be indexed for inflation in computing the chargeable gain from foreign life policies,
• capital losses are not to be allowed as a deduction from chargeable gains on foreign life policies, and
• the annual exemption is not to apply to such gains.

A policy taken out before 20 May, 1993 is liable to capital gains tax in respect of the growth in value of the policy from 20 March, 2001.

The proceeds from a foreign life assurance policy on the death or disability of the policyholder are liable to tax to the extent that those proceeds are the profits from investment and not a payment in respect of the risk or death or disability which an assurance company assures against.

[However, a different taxation regime applies from 1 January 2001 in respect of policies issued from EU, EEA and treaty countries (see Part 26, Chapter 6).]

The section further provides that Irish corporation tax cannot be avoided on the investment return accruing where an Irish life assurance company reinsures life assurance business (within the “I – E” taxation regime) with a foreign life assurance company. The charge to tax applies as respects reinsurance contracts relating to such life assurance business commenced on or after 1 January, 1995. However, payments on the occurrence of a risk covered by the reinsurance, as distinct from investment income and gains accruing in respect of the reinsurance contract, are not charged.

Details

Definitions and construction

(1)(a)(i) A policy of life assurance or a contact for a deferred annuity on the life of any person, which is issued or made before 20 May, 1993, is treated as one issued or made after that date if there is a variation of the policy or contract on or after that date which enhances it or extends its term. This is intended to prevent the circumvention of section 594 by the variation of agreements in existence on 20 May, 1993.

(1)(a)(ii) The substitution of a new policy or contract for one made before 20 May, 1993 or a change in the terms of such a policy or contract constitutes a variation for the purposes of subsection (1)(a)(i). This applies even where the substitution or changed terms were provided for in the policy or contract as made or issued before 20 May 1993.

(1)(b) Subsections (3) and (4) of section 593 apply for the purposes of construing section 594 so as to specify transactions which will constitute a disposal of rights under a policy of assurance or a deferred annuity contract. However, the application of subsections (3) and (4) of section 593 will not be subject to subsection (2) of that section which provides the capital gains tax exemption which is withdrawn from foreign policies and contacts by section 594.

“assurance company” means—

1. an assurance company within the meaning of section 3 of the Insurance Act, 1936, or
2. (1)(c)(i) a person that holds an authorisation within the meaning of the European Communities (Life Assurance) Framework Regulations 1994 (S.I. No. 360 of 1994).

A “relevant company” is a company resident in the State or an overseas life assurance company which is chargeable under Case III of Schedule D in respect of its income from the investment of its life assurance fund. An overseas life assurance company is (see section 706) a non-resident assurance company carrying on life assurance business through a branch or agency in the State.

The definition of “relevant company” ensures that section 594 does not apply, except in the case of excluded policies, to policies issued or contracts made by a resident company or a non-resident company carrying on a trade in the State through a branch or agency.

An “excluded policy” is defined such that section 594 will apply to a policy issued or contract made by an IFSC company which is issued to or made with a person who from the date of issue or the date of contract did not continuously reside outside the State for a period of 6 months.

(1)(c)(ii)(I) Subsection (2) applies to a policy of assurance or contract for a deferred annuity on the life of any person which is a policy issued or a contract made, as the case may be, otherwise than by an assurance company which is a relevant company.

(1)(c)(ii)(II) The subsection also applies to a policy of assurance or contract for a deferred annuity on the life of any person which is a policy issued or a contract made, as the case may be, where such policy or contract is an excluded policy issued or made by a relevant company to which section 710(2) applies i.e. a company trading from the International Financial Services Centre (IFSC).

(1)(c)(iii) Subsection (2) is applied as if section 573(2)(b) had not been enacted. That provision ensures that death is not treated as involving a disposal of the assets by the deceased.

(1)(c)(iv) (I) & (II) For the purposes of subsection (2), there is a disposal of or of an interest in the rights of a policy of assurance where benefits are payable under the policy. Where, at any time, a policy of assurance or an interest in such a policy gives rise to benefits in respect of death or disability either on or before maturity of the policy, the amount or value of the benefits which are to be taken into account for the purposes of determining the amount of a gain under subsection (2) is the excess of the value of the policy, or the interest in the policy, immediately before that time over the value of the policy, or the interest in the policy, immediately after that time.

(1)(c)(v) For these purposes the value of a policy, or an interest in a policy, at any time means —

• in the case of a policy which has a surrender value, the surrender value of the policy, or of the interest in the policy, at that time, and
• in the case of a policy which does not have a surrender value, the market value of the rights or other benefits conferred by the policy, or the interest in the policy, at that time.

Relevant gains

(2)(a) The definition of “relevant gain” makes the provisions of subsection (2) applicable not only to the chargeable gains arising on the disposal of a foreign policy or contract, or of an excluded policy by the original beneficial owner, but also to the gains arising on a disposal by a person who purchased the policy or contract and who is not the original beneficial owner. The latter disposal would be chargeable by virtue of section 593 in any event – but not on the basis set out in section 594.

(2)(b) The exemption provided under section 593(2) in respect of capital gains arising from the disposal of life assurance policies and deferred annuity contracts is withdrawn where the policies and contracts are issued by companies not within the charge to corporation tax or are excluded polices issued by an IFSC life assurance company.

(2)(c) Relevant gains are to be computed without indexation relief under section 556.

(2)(d) Relief in respect of allowable losses is restricted so as to ensure that the chargeable gain arising on “foreign” life assurance policies and deferred annuity contracts and excluded policies issued by an IFSC life assurance company is not reduced by such losses.

Gains arising on a “foreign” life assurance policy or deferred annuity contract or on an excluded policy issued by an IFSC life assurance company are to be fully chargeable notwithstanding the annual small gains exemption.

(2)(f) The rate of capital gains tax which applies to relevant gains is 40 per cent. However refer to Part 26 Chapter 6 for the tax treatment from 1 January 2001 of life policies issued from EU, EEA and treaty countries.

(2)(g) Where a policy was issued or a contract was made before 20 May, 1993, only so much of the gain on disposal as accrued on or after 20 March, 2001 will be a chargeable gain.

Charge on reinsurance gains

(4)(a) A “reinsurance contract” is defined as any contract or other agreement for reassurance or reinsurance in respect of any policy of assurance on a person’s life or any class of such policies which are not new basis business within the meaning of section 730A. The definition does not elaborate on the meaning of “reassurance” or “reinsurance” which are to have their ordinary meaning. Although “reassurance” is sometimes used with reference to life business, as distinguished from non-life insurance business, both “reassurance” and “reinsurance” are in common usage. Reinsurance arrangements or “treaties” would generally provide for the automatic transfer of a specific part of the risk in respect of business accepted by the primary insurer. Accordingly, the reinsurance contract would not, generally, be entered into in relation to particular policies.

Under the new regime for the taxation of “new basis business” of life assurance companies under Case 1 of Schedule D contained in section 730A, profits from such reinsurance business are automatically taken into account. That being so, it is no longer necessary to have specific provision to tax reinsurance business falling within “new basis business”. However, under the I – E taxation regime of life companies, profits on reinsurance are not taken into account. Hence, they are charged to capital gains tax under this section.

(4)(b) Provision is made to put beyond doubt that for the purposes of the Capital Gains Tax Acts a reinsurance contract is a policy of life insurance on human life.

(4)(c) It would be inappropriate to allow subsection (2)(d) – which restricts the set-off of losses against “foreign” life policy gains – to apply to reinsurance contracts. Thus, the provisions of subsection (2) are deemed not to apply to reinsurance contracts (but see paragraph (d) in relation to the partial reinstatement of subsection (2)).

It is also provided that a tax credit does not attach, by virtue of section 595, to foreign reinsurance contract gains. [Section 595 gives Irish companies credit for the Irish tax, charged at source under the I – E regime on Irish life assurance policy gains, while charging those gains to full corporation tax.]

(4)(d)(i) The basic provision of subsection (2) – which is to withdraw the capital gains tax exemption of life assurance policies in the case of foreign life assurance policies – is reinstated in the case of reinsurance contracts. This is not done by further reference to subsection (2) but rather by direct reference to the exemption set out in section 593(2). The reference to “where subsection (2) (apart from paragraph (c)) would apply to a reinsurance contract” is intended to ensure that the reinsurance contracts affected are those with a foreign reinsurer.

Section 719(2) deems “each asset of the life business fund of an assurance company” to be disposed of and immediately reacquired at market value at the end of each accounting period. Reinsurance contacts are assets of the life business fund. The words “disposal or deemed disposal” are intended to confirm that the exemption of gains on life assurance policies from tax is to apply to neither actual disposals nor deemed disposals of foreign reinsurance contracts.

The reinstated “chargeability” of reinsurance contracts applies to those contracts only to the extent that they reinsure risks accepted on or after 1 January, 1995, and that the reinsurance of the original life assurance policy is in the nature of an investment policy, that is, the insured company should have the prospect, or even the possibility, of receiving more under that part of its reinsurance treaty than it will pay out under that part.

(4)(d)(ii)(I) The reinsurance of policies issued after 1 January, 1995 is chargeable to tax even if the reinsurance contract predates the effective date of subsection (2) (see subsection (1)(c)(iii)), that is, 20 May, 1993. The chargeability is ensured in such cases by deeming reinsurance contracts made before 20 May, 1993 to have been made on that date.

(4)(d)(ii) (II) Where the reinsurance contract is negotiated or renegotiated after 1 January, 1995, the reinsurance gains are chargeable to tax regardless of the date of the policies which are reinsured.

(4)(d)(iii) Where a life assurance policy was issued before 1 January, 1995 but varied on or after that date, the policy is treated for the purposes of the charge on reinsurance contracts as having been issued on or after 1 January, 1995.

(4)(e) Risk benefit payments under a reinsurance contract are exempted from the charge to tax by deeming disposals resulting from the death, disablement or disease of a policyholder covered by the reinsurance to be disposals of an exempt life assurance policy. The reference to “rights” rather than to “the rights” under a reinsurance contract in the opening lines of paragraph (e) is intended to confirm that such disposals would normally be a disposal of “rights” in the sense of part of the insured company’s rights under a reinsurance contract rather than a disposal of “the” rights under the reinsurance contract in the sense of the whole of those rights.

(4)(e)(i) In computing gains or losses on disposals or deemed (under section 719(2)) disposals of rights under reinsurance contracts, premia in respect of risk reinsurance are not an allowable deduction under section 552.

(4)(e)(ii) Risk reinsurance or risk cover is expressed as an “entitlement to a payment” in the event of the risk. The insured company pays premia in order to be entitled to receive a payment on the death, etc of a policyholder of the insured company. The risk premium is referred to as “so much” of any payment because the provision governing the non-deductibility of premia is applied to mixed investment/protection products and it is necessary to determine how much of each premium payment is paid in respect of risk cover. Given that risk cover is sold separately, it should be possible to impute an amount per premium to the risk cover included in a mixed investment/risk product. Alternatively, it should be possible to identify the part of a recurring or single premium required to produce a promised investment return.

Provision is made to deter life assurance companies from engaging in relatively artificial arrangements to take reinsurance of risks in place of a normal investment return. Investment returns increase the market value of a reinsurance contract at the end of each accounting period when the contract is deemed to be disposed of. They also increase the actual payout on the maturity of the reinsurance. Reinsurance cover on the other hand is “used up” or “wasted” as the period of cover progresses. At the end of the period the reinsurance cover will have no value since it will have ceased.

To deter such arrangements, in computing gains or losses on disposals or deemed (under section 719(2)) disposals of rights under reinsurance contracts, the market value of an entitlement for any period, commencing on or after the most recent acquisition or deemed (under section 719(2)) acquisition of those rights, to risk benefit payments on the death, etc of a policyholder covered by the reinsurance is to be treated as consideration. This provision applies to the extent that the insured company held that entitlement for the period in question in pace of any return which would otherwise have accrued under the reinsurance contract and increased the consideration for the disposal or deemed disposal of rights under the contract.

“Market value” is defined for the purposes of Capital Gains Tax Acts by section 548. The words in relation to the period “commencing on or after the most recent acquisition, etc.” are intended to prevent any double-counting of risk cover taken in place of investment return. Reference is made to the “most recent” acquisition because the reinsurance rights are deemed (under section 719(2)) to be reacquired by the insured company annually. “Return” is intended to encompass investment income or gains.

Relevant Date: Finance Act 2019