APCAL Technical Training : Spain & Portugal · Introducing OneLife -7-Traditional asset portfolio Life assurance Income tax Fixed and variable proceeds arising from traditional investments

APCAL – Technical Training : Spain & Portugal

OneLife

Your OneLife expert

OneLife -3-

Gonzalo García

Perez

Wealth Structuring Manager Iberia & Latam

[email protected]

Introducing OneLife 4


-6-

Savings Income Tax (Rendimientos del capital mobiliario)

Introducing OneLife

– Spanish Income Tax Law 35/2006 of 28 November

National Legislation – partial delegation / prerogatives* to the benefit of Spanish regions, i.e. establishment of particular tax rates, deductions, exemptions…and for certain types of income (for instance, employment income).

Savings Income Tax is governed by national legislation* and is harmonized at national level (see next slide)

o Art 21: taxation on investment income (dividends, interests, …)o Art 25.3: Return on investments through life assurance policies **

* Exception: Basque Country / Navarra ** Only in the case where the policyholder is as well the “beneficiary” of the policy. The term “beneficiary” is to be understood as economical beneficial owner:

Quote: “Los rendimientos, dinerarios o en especie, procedentes de operaciones de capitalización y de contratos de seguro de vida o invalidez generan rendimientos del capital mobiliario sujetos al IRPF, siempre que coincidan contratante y beneficiario en una misma persona”

-7-Introducing OneLife

Traditional asset portfolio Life assurance

Income tax Fixed and variable proceeds arising from traditional investments (e.g. interest and dividends) are subject to the following sliding scale*:

Proceeds arising from a life assurance policy are only subject to tax* upon a partial or full surrender of the policy. >> Full Tax deferral – section 14.2.H of Spanish Law 35/2006.

The tax rates applicable are equivalentto a “Traditional Asset Portfolio”.

Advantage: Full netting of gains / losses within the policy structure.

Capital gains arising from sales and switches of assets are also subject to the sliding scales above

* Exception: Basque Country/Navarra

Methodology of gain computation: Proportionate ( ≠ FIFO)

* The insurer will apply a 19% withholding tax at source – computed on the gain realized (partial/total)


-8-


Introducing OneLife

– Spanish Income Tax Law 35/2006 of 28 November – Article 14.2.h.A

Option 1 – No influence of the policyholder in the underlying investments:

Investment modality: Discretionary Fund Management - No “personalized” / “tailor-made” investment strategy

- “Collective”, “pre-determined” and “standardized” investment strategies- No personal link between the Policyholder and the assets / asset management –

Quid: Unquoted assets??!!▶▶ Consult Binding Tax ruling V 2366-08 dated 15 December 2008

Investment Rules: CAA rules (only)

-9-


Introducing OneLife

– Spanish Income Tax Law 35/2006 of 28 November – Article 14.2.h.B

Option 2 – Policyholder has the possibility to exert an influence in the underlying investments :

Investment modality (I): Fund Picking – External Funds- External Funds adapted to Spanish Law 35/2003 of 4 November, on collective

investment institutions, or- External Funds covered by Council Directive 2009/65/EC (or any future replacement).

Investment modality (II): Basket of Assets - The assets included in each Basket of Assets should be of the kind foreseen in the

Spanish regulatory insurance legislation (Article 50 of Royal Decree 2486/1998 *, November 20, approving the Regulations for the Organization and Supervision of Private Insurance). Each Basket of Assets must comply with the limits on diversification and dispersion laid down, as a general rule, for insurance companies by Royal Legislative Decree 6/2004, March 5, approving the revised text of the Law on administration and supervision of private insurance and Royal Decree 2486/1998.

* This concrete article of the Royal Decree is now derogated which creates a situation of legal

uncertainty as to the full applicability (or not) of this article.


-11-

Wealth Tax (Impuesto sobre el Patrimonio)

Introducing OneLife

– Spanish Wealth Tax Law 19/1991 of 6 June

National Legislation (basic and default framework*) – significant delegation / empowerment to the benefit of Spanish regions - establishment of autonomous tax rates, tax scales, tax deductions, tax exemptions, ….

Quote: “Artículo 17: Seguros de vida y rentas temporales o vitalicias Uno. Los seguros de vida se computarán por su valor de rescate en el momento del devengo del Impuesto.”

Wealth Tax Regional legislation – significant disparity between Spanish regions !!

* Exception: Basque Country/Navarra



Wealth tax (national taxscale – default)

Wealth tax(regional specificities)

The market value of financial assets (i.e. portfolio) or the surrender value of a policy will be subject to this progressive tax scale:

Andalucía (0,24% - 3,03%) *Balearic Islands (0,28% - 3,45%) *

Catalonia (0,21% - 2,75%) *Valencia (0,25% - 3,12%) *Madrid : 99% tax credit

* The final and effective tax rate for Wealth Tax purposes will depend on many factors : tax exemptions, rates, brackets, credits,…applicable in a given Spanish region.


-13-


Introducing OneLife

– Reporting obligations:

– The Insurance company acting in Spain under the Freedom to Provide Services will declare the Surrender Value of the Policies held by Spanish residents to the Spanish Tax Authorities – Form 189

– Spanish resident policyholders do not need to include the value of their policies in Form 720 as the information was already provided by the Insurer

Q&A STA on Form 720: Quote: “Respuesta: Respecto de los seguros de vida que el tomador haya contratado con entidades aseguradoras extranjeras que operen en España en régimen de libre presentación de servicios, no existe obligación de informar sobre los mismos en virtud del artículo 42 ter.3 del Reglamento General aprobado por el Real Decreto 1065/2007, de 27 de julio, siempre que, en cumplimiento de lo establecido en el artículo 39.3.a) del citado Reglamento General, el representante de dichas entidades aseguradoras proporcione a la Administración tributaria la información prevista en el mismo.”

-14-


Introducing OneLife

– Tax Planning with life assurance:

According to the consolidated doctrine of the Spanish Tax Administration ( Direccion General de Tributos) and later confirmed by case law, the appointment of irrevocable beneficiaries (other than the policyholder) allows the policyholder to exclude the surrender value of the policy (assessed on 31.12) from his/her wealth tax computation base in Spain*.

▶▶ The notion of “irrevocable beneficiaries” ≠ “beneficiaires acceptants” under French or Luxembourg legislation. ▶▶ Read Judgment of the Supreme Court of Madrid dated 11 May 2016 (rec. 1074/2013)▶▶ Old Ruling of the STA (DGT) V 2187-05 (and further clarification).

*This approach is not followed by the Basque Country, nor by Navarra as the locally adapted Wealth Tax law was modified to

exclude such tax exemption mechanism.

Article 17 – Wealth Tax law of NavarraQuote: “No obstante, en los supuestos en los que por aplicación del artículo 87 de la Ley 50/1980, de 8 de octubre, del Contrato de Segu ro, se haya perdido el derecho de rescate por haber renunciado el tomador del seguro a la facultad de revocar la designación de beneficiario, el seguro se computará en la base imponible del tomador por el valor del capital que correspondería obtener al beneficiario en el momento del devengo del impuesto. El mismo valor se computará en la base imponible del tomador cuando se trate de seguros que no tengan derecho de rescate”.

-15-


Introducing OneLife

– Tax Planning with life assurance:

– However, the STA has issued a series of Tax Rulings during 2017/2018 concerning insurance products under which the surrender rights of the policy were excluded until the term date of the policy (i.e. a pre-defined date set in the policy – for instance 3 years since issuance). In such cases, the STA has also admitted the non-applicability of Wealth Tax to the surrender value of the policy as at 31.12, despite the fact that the policyholder was to be appointed as beneficiary upon the term. However, the suppression of the surrender rights needs to be in force until the end/termination of the policy (i.e. not for a limited time period).

IMPORTANT: regardless of the divergent tax rates, scales, exemptions, credits, bonifications applicable in the different Spanish regions for Wealth tax purposes, the STA criterion applies at national level (with the exception of the Tax Agencies of Navarra and Basque Country) which leads to the conclusion that the before described principles will have to be followed by regional tax authorities in Spain when assessing or auditing concrete files.

▶▶ See Binding Tax Ruling V2516 – 17 – Mutuactivos / V3070 – 17 / V2953 – 17.



– Spanish Inheritance and Gift Tax Law 29/1987 of 18 December – Spanish Inheritance and Gift Tax Regulation 1629/1991 of 8 November

National regulatory framework (basic and default provisions) – significant delegation / empowerment to the benefit of Spanish regions - establishment of autonomous tax rates, tax scales, tax deductions, tax exemptions, …

Inheritance and Gift Tax Regional legislation – significant disparity between Spanish regions !!

Inheritance and Gift Tax (Impuesto de Sucesiones y Donaciones)



Inheritance tax Tax rates differ from one Spanish region to another. However, by default, transfers are subject to the following sliding scale

Depending on the net wealth held by the beneficiary and on his/her relationship with the deceased/insured person, transfers will also be subject to a multiplier rate:




General principle:

– Policy benefits received by a beneficiary(ies) of a life insurance contract fall within scope of Spanish IHGT, except if the Policyholder(s) has/have been appointed as Beneficiary(ies) of that same contract.

Article 3 of Spanish IHGT LawQuote “1. Constituye el hecho imponible:c) La percepción de cantidades por los beneficiarios de contratos de seguros sobre la vida, cuando el contratante sea persona distinta del beneficiario […]”

Policy structures and tax consequences:

“STANDARD” PLANNING:

- Policy Benefits received by a beneficiary (different than the Policyholder(s)) in a whole-of-life policy where the Policyholder coincides with the Live Assured will be subject to INHERITANCE TAX.

Article 24 of the Spanish IHGT Law“En las adquisiciones por causa de muerte y en los seguros sobre la vida, el impuesto se devengará el día del fallecimiento del causante o del asegurado […]



Policy structures and tax consequences (cont’d):

“COMPLEX” PLANNING:

- Policy Benefits received by a beneficiary(ies) in a “survival policy” (i.e. term policy) – who is /are different than the policyholder(s) - will be subject to GIFT TAX

- Policy Benefits received by a beneficiary (ies) in a “whole-of-life policy” – who is/are different than the policyholder (s) – where the live (s) assured (s) is/are different than the policyholder (s) will be subject to GIFT TAX

Article 12 of the Spanish IHGT Regulation“Quote: Negocios jurídicos gratuitos e «ínter vivos».e) El contrato de seguro sobre la vida, para caso de sobrevivencia del asegurado y el contrato individual de seguro para caso de fallecimiento del asegurado que sea persona distinta del contratante, cuando en uno y otro caso el beneficiario sea persona distinta del contratante”



Tax Planning

- GIFT or SUCCESSION PLANNING

In Spain, GIFT TAX is paid by the beneficiary in accordance with the rules of the Spanish region where he is resident at the time of receipt of the policy benefits (i.e. 5 year rule), however, SUCCESSION TAX is paid by the beneficiaries in and in accordance with the rules applicable in the region where the policyholder/insured was resident at the time of death.

The residency amongst Spanish regions for IHGT purpose is determined according to the “5 year rule”, i.e. place where the person has spent more time in the last 5 years.

As said before, the tax rates, scales, exemptions, deductions are rather different depending on the Spanish region. For instance, in Catalonia, the tax rates are much lower for GIFT TAX (if compared to SUCCESSION TAX) and in Madrid there is a 99% tax credit applied for GIFT TAX / SUCCESSION if the transfer occurs between ascendans, descendants, spouses.

Conclusion: the Policy Planning may have a significant impact on the final outcome in terms of IHGT liability whenever the policy pays out the benefit to the beneficiaries.




Tax Plannings for IHGT purposes - deferral

- IHGT liability deferral for “survival” or “term” policies

The tax liability for IHGT purposes in Spain will only arise if the access to the benefits of the policy is “unrestricted”. If the access to the policy benefits is subject to condition, term or any other limitation, the IHGT liability will not arise

Article 24.3 of the Spanish IHGT LawQuote: “Toda adquisición de bienes cuya efectividad se halle suspendida por la existencia de una condición, un término, un fideicomiso o cualquier otra limitación, se entenderá siempre realizada el día en que dichas limitaciones desaparezcan.”



-26-

– New Budget 2019 (not voted and approved)

Increase of marginal Personal Income Tax rates (45% to 47% (over EUR 130k) and 49%(over EUR 300.000))Increase of Savings Income tax (23% to 27% (for savings income exceeding EUR 140.000))Additional 1% for net wealth over EUR 10.000.000. No changes proposed for Inheritance and Gift Tax

– SICAV: 1% CIT is maintained but new requirements to avoid “shareholding concentration” were introduced and the oversight was to be transferred to the Spanish Tax Authorities - AEAT (from the Spanish CNMV)

– SOCIMI: Real Estate Investment Companies: Currently 0% on retained earnings. Proposed measure: Increase to 15%.

– Will the above measures be approved in the near future?

Update 2019 – General Update

Introducing OneLife

-27-

– New Budget 2019 (not voted and approved)

– New proposed valuation rules for life assurance policies

Current: The redemption value of the insurance policy on 31 December is regarded as the taxable base for Wealth Tax purposes every year. If there is no possibility of redemption (i.e. no surrender rights over the policy) the value is 0.

Proposed: The redemption value of the insurance policy on 31 December is regarded as the taxable base for Wealth Tax purposes every year. However, if the value is 0, the value of the mathematical reserves at that moment (i.e. the NAV) will be used as a reference for Wealth Tax purposes.

- Time to review policy structures?

Update 2019 – Life Assurance

Introducing OneLife



– No Wealth Tax– No Inheritance and Gift tax– Stamp Duty (but does not apply to life insurance)– Premium tax – 0,048% applied on the initial Premium and any further Additions– Risk Premium Tax – 2,5% charge levied by the Portuguese INEM and applicable on

the “death cover” element of the UL – Life Assurance policy - i.e. only applicable on the risk element, not the Premium invested.

– Taxation: 28% up to 5 years / 22,4% After 5 years / 11,2% After 8 years.



– FIFO vs Proportionate

The law is not clear on the methodology to be used for the determination of the taxable income generated by partial surrenders. There is no consistent approach amongst Portuguese lawyers and Insurance companies.

FIFO method: In case of partial surrender, the surrendered amount is exclusively comprised of premium (i.e. capital). Only when the premium is totally withdrawn, the income element will be taken into consideration for taxable purposes.

Proportionate method: In case of surrender, the surrendered amount is comprised of capital (i.e. premium) and income (i.e. proportional basis).

My “personal” view: It is up to the policyholder to opt for a given gain computation “methodology” based on a qualified tax advice provided to him in Portugal. Additionally, note that a Luxembourg Insurer offering insurance products in Portugal does not have tax withholding obligations when transacting a surrender requested by a Portuguese resident policyholder.


– New Portuguese provisions – GAAR – Art 38/2 (transposition ATAD)

Test 1: “constructions / arrangements or series of, carried out for the principal purpose or one of the principal purposes of obtaining a tax advantage […] abuse of legal form or nor considered genuine”.

Test 2: “no valid economic reasons and not reflecting the economic substance”.

Quid: Self-Management?? Time to review policy structures??

Attention points:

- Policyholders with direct proxies on Policy Accounts- Shares of non-quoted companies- Underlying investments located in “black-listed” jurisdictions- Policyholders who maintain a key influence in the underlying assets of the Policy (for

instance, Policyholders who remain as Board Members or Directors of companies which shares are held under their own policies).


Conditions to get the status of Non-Habitual Resident

– Not having been a tax resident in the previous 5 years

– Spend more than 183 days in Portugal in the tax year

– Status granted for 10 years

– Not strictly related to GOLDEN VISA programme

Special tax regime for a Non-Habitual Resident

– Exemption from personal income tax on foreign income which may be subject to taxation in the country of source (according to double tax treaties)

– Pensions– Dividends – Royalties– Interests– Capital gains

Non Habitual Residents in a nutshell

34OneLife

Non Habitual Residents : the advantages of life assurance

35

The income derived from a Portuguese law policy issued by a Luxembourg carrier, may be taxable in case of partial or total surrender : the income is classified as “Other Income” and therefore exclusively taxable in the country of residence of the policyholder – i.e. does not satisfy the “NHR test”.

OneLife

Non Habitual Residents : the advantages of life assurance

36

Not all the income is exempt under the Portuguese NHR regime (for instance, capital gains or distributions from fiduciary structures). In this sense, life assurance can help in the following scenarios:

1. The client holds a portfolio which generates substantial capital gains due to “high rotation” (buy-sell).

2. The client receives income from structures or funds located/domiciled in black-listed jurisdictions –taxation might go up to 35%.

3. The client will benefit from simplified reporting.

4. The solution is fully compliant with the Portuguese legal & tax framework compared to fiduciary and offshore structures.

5. The solution simplifies cross-border succession procedures linked to multiple jurisdictions.

6. The solution is “portable” in case of return to home country.

7. Offshore solutions with low or no substance are increasingly at risk.

OneLife


Spain

38

PROYECTO DE REAL DECRETO (JUNE 2019) :

OneLife

Portugal

39

DRAFT LEGISLATION (MAI 2019) :

OneLife

Introducing OneLife

The content of this document is intended solely to provide general information on the products and/or services provided by the life assurance company The OneLife Company S.A. (OneLife).

It does not constitute any offer or solicitation for the purchase of any life assurance product.

OneLife does not warrant, represent or guarantee that the information contained within this document is complete, accurate or up-to-date. Neither is this information intended to constitute any form of legal, fiscal or investment advice and the information provided in this document or any other pre-contractual document should therefore be used only in conjunction with appropriate professional advice obtained from a suitable qualified professional source.

40

onelife.eu.com

Documents

APCAL Technical Training : Spain & Portugal · Introducing OneLife -7-Traditional asset portfolio Life assurance Income tax Fixed and variable proceeds arising from traditional investments