1.Introduction
As the general public’s risk awareness matures, the use of insurance policies become more and more popular in Taiwan. In order to prepare for the unknown, and to diversify the risk, it is common for the general public in Taiwan to hold insurance policies, and sometimes multiple of them.
According to Article 16, Subparagraph 9 of Estate and Gift Tax Act “Insurance Payment paid to the designated beneficiary at the time of death of the insured under life insurance, or insurance covering soldiers, civil servants, or teachers, or labor insurance, or farmer insurance” are excluded from the taxable estate. As a result, buying life insurance before death might be a practical way for tax saving in family succession planning. (However, there will still be alternative income tax issues. Please see below.)
It should be noted that the insurance payment is excluded in the taxable estate from the tax law perspective, but whether the insurance payment is included in inheritable estate from the civil law perspective, are two different concepts. In regards of whether the insurance payment is included in the inheritable estate, Article 112 of the Insurance Act specifically stipulates that: “If it has been stipulated that the insurance payment is to be paid upon death of the insured to the designated beneficiaries, such payment shall not be included as part of the insured’s inheritable estate.”
According to the laws and regulations cited above, if the deceased and the insured are the same person and a beneficiary has been designated in the insurance policy, the insurance payment will not be included in the insured’s inheritable estate in terms of both Tax Act and Civil Code. However, it should be noted that in the current practices, there are many cases where the National Taxation Bureau still includes the insurance payment paid to the beneficiaries as part of the taxable estate according to the Principle of Substantive Taxation stipulated in Article 12-1 of the Tax Collection Act.
This article intends to discuss the following issues: (1) Are there any exceptions to Article 112 of Insurance Act? That is, will the insurance payment be included in inheritable estate on an exceptional basis? (2) If the deceased utilized most of his property to pay the insurance premium before his death, can the heirs who are not designated as beneficiaries claim that their rights (such as their compulsory portion right) have been infringed upon?
2.Taxation of Insurance Payment and the Principle of Substantive Taxation
(1) Estate and Gift Tax Act, Income Basic Tax Act, and Insurance Payment
According to Article 16, Subparagraph 9 of Estate and Gift Tax Act, insurance payment paid to the designated beneficiary are excluded from the taxable estate, and it should be noted that according to Article 12, Paragraph 1, Subparagraph 2 of Income Basic Tax Act “Insurance payment received by the beneficiary of a life insurance policy or annuity in which the beneficiary and the proposer are not the same person and the life insurance policy and annuities are contracted after this Act coming into force. However, in the case of payment made upon the death of the insured person, the part of which aggregate of payment made in a filing unit is equal to or less than NT$30,000,000 may be excluded from the basic income.”
The NT$30,000,000 threshold has been increased to the NT$33,300,000. That is, for the life insurance policy or annuity in which the beneficiary and the proposer are not the same person, the insurance payment in the case of payment made upon the death of the insured person that exceeded the NT$33,300,000 should still be included in basic income that would be subject to tax.
(2) Principle of Substantive Taxation
According to the current taxation practice, “Principle of Substantive Taxation” should be understood as, in order to attain the purpose of the tax laws, we should focus on the economic substance of transactions and fairness of taxation, rather than relying on the external legal forms, when interpreting the tax laws, and to impose tax based on attribution of the substantive economic benefits.
To facilitate the enforcement of the principle of substantive taxation, the Ministry of Finance has reiterated the common characteristics set forth in “Practical cases and reference characteristics when applying the principle of substantive taxation in whether insurance payment should be included in taxable estate” (Reference No. 2020-July-01 Tai-Tsai-Shuei-Zhi No.10900520520 Letter), and has provided a list of scenarios that contains the common characteristics for which the principle of substantive taxation would apply, such as: 1. Lump-sum and large-amount insurance premium; 2. Buying insurance policies at a very old age; 3. Buying insurance policies when diagnosed with serious illness; 4. Buying insurance policies right before the death of the insured; 5. Very large-amount of insurance premium; 6. Buying insurance policies with borrowed money; 7. Buying multiple insurance constantly within a very short period; 8. The total amount of the insurance premium plus interest are equal to or even higher than the amount of insurance payment; etc. If multiple common characteristics are found to be existing in a specific case, the principle of the substantive taxation would be applied.
Please note that, the principle of substantive taxation is only applicable to tax collection, and will not be applied when determining whether to include the insurance payment in the inheritable estate from the civil law perspective. That is, even if the insurance amount has been included in the taxable estate by the National Taxation Bureau in accordance with the principle of substantive taxation, under current practices, the insurance payment would not necessarily be included in the inheritable estate to which the heirs may claim.
3.Life Insurance Payment, Entitled Portion, and Compulsory Portion
Article 1225 of the Civil Code provides that: “A person entitled to a compulsory portion may have the amount of the deficit deducted from the bequeathed property, if the amount of his compulsory portion becomes deficient on account of bequeath made by the testator. If there are several legatees, deductions must be made in proportion to the value of the legacies they severally receive.”
Article 1224 of the Civil Code provides that: “A compulsory portion is determined by deducting the amount of debts from the inheritable estate as reckoned according to Article 1173.”
If the property left by the deceased includes real estate, bank loans, and life insurance payment paid to the designated beneficiary (while the insurance premium was paid with the amount borrowed from bank), the inheritable estate calculated in accordance with Article 1173 of the Civil Code should include both assets and debt. In this situation, generally the loan from bank should be included (deducted from) the inheritable estate. The potential issue is that, whether the heirs who are not designated as the beneficiaries of the life insurance payment can claim that the insurance premiums paid by the testator infringes his or her compulsory portion, on the ground that the testator was “buying insurance policies with very large-amount of insurance premium and with borrowed money”?
It should be noted that, pursuant to Article 1225 of the Civil Code, if the amount of his compulsory portion becomes deficient on account of bequeath made by the testator, a person entitled to a compulsory portion may have the amount of the deficit deducted from the bequeathed property.
Therefore, even if the insurance policies purchased by the deceased before his death will be deemed as for tax avoidance purpose and thus the insurance payment might be taxed under the principle of substantive taxation, it is still not a “bequeath” made by the testator. Therefore, a deduction under Article 1225 of the Civil Code can not be applied.
Please note that, the administrative court has made the following decision: “In accordance with Article 112 of the Insurance Act and the first paragraph of Article 16, Subparagraph 9 of the Estate and Gift Tax Act, insurance payment paid to the designated beneficiary at the time of death of the insured under life insurance are excluded from the estate.
The purpose of such statutes is that, considering the intention of the testator when buying such an insurance policy was to guarantee that the beneficiaries would not suffer from the sudden loss of economic support, the estate tax should not be levied on the insurance payment, or otherwise it would contradict the purpose of insurance if to tax on the insurance payment paid to the beneficiaries. It is not meant to encourage nor to indulge people to exploit such statutes to avoid the estate tax that should have been borne by the estate of the deceased.
Therefore, for those people who buy insurance policies before their death so to avoid estate tax, based on the Principle of Substantive Taxation, Article 112 of the Insurance Act and the first paragraph of Article 16, Subparagraph 9 of the Estate and Gift Tax Act shouldn’t be applied.
(Taipei High Administrative Court Decision 2009-Su-Zhi-No.135, Supreme Administrative Court Decision 2011-Pan-Zhi-No.256）.
According to the above Administrative court decisions, life insurance payments may be included in the taxable estate based on the principle of substantive taxation; in addition, life insurance payments might be included in the inheritable estate, on the ground that Article 112 of the Insurance Act is not applicable in certain situation.
4.Conclusion
In summary, Article 112 of the Insurance Act, Article 16, Subparagraph 9 of the Estate and Gift Tax Act, and Article 12, Paragraph 1, Subparagraph 2 of the Income Basic Tax Act respectively stipulate whether the life insurance payment shall be included in the inheritable estate from the civil law perspective, whether it shall be included in the taxable estate under the Estate and Gift Tax Act, and whether it shall be calculated in the beneficiary’s basic income under the Income Basic Tax Act.
While the Ministry of Finance has developed the principle of substantive taxation which could be applied to taxable estate, it should also be noted that the administrative court has issued decisions in which Article 112 of the Insurance Act might not be applicable in certain situations. If Article 112 is not be applicable, the insurance payment may also be included in the inheritable estate.