This article provides information on the taxation of life policies in Italy.
General information regarding Italian residents
There is no difference in the taxation of a resident national and a resident foreign national. According to Italian tax law if you are regarded as resident in Italy then such individuals are subject to individual income tax on their worldwide income.
Old Mutual International products
There may be situations where an individual who holds a Old Mutual International product moves to Italy.
Where a policyholder maintains a high degree of influence and control over the policy, there is a risk that the tax authorities will seek the application of the Italian tax anti-avoidance rules. Indeed, an ample degree of investment control by the policyholder is not typical of the life assurance products and could be interpreted as effectively granting the true ownership of the underlying assets to the policyholder. The tax authorities may view this circumstance as an abuse of the scheme of the life assurance agreements in order to benefit from their favourable tax regime and to avoid the tax treatment which would otherwise be applicable if the policyholder directly made an investment in the same underlying asset.
Therefore, it is possible that a portfolio bond product is unlikely to benefit from the favourable tax regime afforded to life insurance policies. This is likely to include Old Mutual International’s portfolio bonds.
It is also not clear what the tax treatment would be for a policy which was provided by an offshore life office prior to residence in Italy. Further advice should be sought from a local legal adviser.
For products recognised as life assurance policies offered by freedom of services providers or domestic insurers the taxation position is as follows:-
Italian tax legislation does not provide a definition of life assurance policies for tax purposes.
Therefore, to the extent a product distributed on the Italian market is characterised as a life assurance product according to civil and regulatory law, that product is subject to a favourable tax regime. There are no minimum life cover amounts, terms or restrictions on fund links to gain this treatment.
Tax relief on premiums
It is possible to obtain a small amount of tax relief granted in relation to the portion of a premium which pays for the death benefit or permanent disability benefit.
Tax during the lifetime of the policyholder
Article 45 of Presidential Decree no. 917/1986, provides that the amount paid out in relation to an insurance life agreement, in case of either total or partial surrender of the policy, is considered income.
It is taxable to the extent of the difference between the amount paid out and the premiums previously paid. In simple terms, the amount representing the return on the investment of the premiums paid is considered taxable income.
For a partial surrender calculation it will be a proportionate charge.
Italian insurers or foreign insurers with a permanent establishment in Italy must withhold the tax. Withholding this tax for a non-Italian insurance company is voluntary.
If the foreign insurance company does not opt to withhold the tax, the beneficiary of the income (i.e. the Italian taxpayer) is required to report the income realised out of the policy and to calculate and apply such tax directly in their tax return for the relevant fiscal year.
Life assurance entered into with a foreign insurance company is considered a ‘foreign financial asset generating foreign source income taxable in Italy’. This means that the policyholder is required to report the holding of the policy in the yearly income tax return.
Tax on death
Where a capital amount becomes payable due to the death of the insured person, the full amount paid to the beneficiaries is exempt from taxation as opposed to payments made before the death of the life assured which are subject to taxation only in respect of the difference between the sum received and the premiums actually paid.
Inheritance tax is also now a consideration again in Italy since the reinstatement of inheritance and gift tax in 2007
Inheritance and gift tax
In 2007 inheritance and gift tax were reintroduced.
Assignments can take place for consideration or gratuitously.
If gratuitously, then gift tax may apply depending upon the relationship between the donor and done. There are allowances available in respect of certain relationships.
With an assignment for consideration if a capital gain is realised then tax may apply.
Trusts created under foreign laws are recognised by Italy pursuant to the Hague Convention dated July 1, 1985 (implemented in Italy with law 364/1989) and to the extent they comply with their regulating law.
Both ‘international’ and ‘national’ trusts are recognised.
An International trust can be defined as one where the trust is regulated by a foreign law, managed by a foreign trustee and\or created by a foreign settlor, but composed of Italian assets.
National trusts can be defined as one where the trust is created by an Italian settlor, in favour of Italian beneficiaries, managed by an Italian trustee, and composed of Italian assets, but regulated by a foreign law. The settlor has the right to choose the law regulating the trust.
Investment risk and responsibilities
There are no investment guarantees associated with our funds and in particular there is no guarantee of the return of capital. We offer a range of funds with varying risk characteristics.
The value of the policy is determined by the value of the units of the funds to which the policy is linked. We accept no responsibility for the investment performance of the funds. The value of units of the funds will depend on the performance of the assets of the funds. The value of the units can fall as well as rise. It should be noted that units and bank deposits, could, in exceptional circumstances, become valueless (this could either be temporarily because of suspension, or permanently). In addition, should any assets be denominated in a foreign currency, there will be exchange rate risks.
Depending on the assets of the funds, there may be limits on the liquidity of the assets. In the event that there are problems liquidating any assets of the funds, the company may defer any transactions involving allocation, cancellation or fund switch until such time as we consider appropriate.
By requesting investment into particular fund or funds the client accepts these investment risks. It is for you and your client to decide which funds are most appropriate to their needs. We do not give advice.