From 1 January 2015, the Flemish Tax Service (“Vlaamse Belastingdienst” or “VLABEL”, hereafter the “FTS”) became authorised to collect both inheritance and gift tax (“erfbelasting” and “schenkbelasting”) and has been very actively executing these new competences.
Meanwhile, Assuralia, the Professional Union of Insurance Companies in Belgium, which represents virtually all Belgian insurance companies, as well as foreign insurance companies operating on the Belgian market, has started legal proceedings before the Council of State. Assuralia justifiably disputes the legal basis of the new position of the FTS with regard to the procedure of the life insurance gift. The attachment contains Assuralia’s press release dated 11 March 2016.
Definition of a life assurance contract of the “AAB”-configuration (= stipulation for the benefit of a third party free of charge) and procedure of the assurance gift
In a typical “AAB”-configuration, the initial policy is subscribed by the parents (A) on their own life and for the benefit of their children (B). Such “AAB” type contracts constitute a “stipulation for the benefit of a third party free of charge” within the meaning of article 18.104.22.168.6 of the Flemish Tax Code (hereafter the “FTC”), and thus constitute a fictitious acquisition subject to inheritance tax.
However, in case all policyholder rights are donated by the parents to the children, the identity of the policyholder transfers from the parents to the children. Accordingly, legal doctrine considers that upon the assurance gift, the policy has become a contract of the type “BAB” (instead of “AAB”), which constitutes “a stipulation for oneself” and which therefore renders article 22.214.171.124.6 FTC inapplicable.
Furthermore, the application of gift tax should also render article 126.96.36.199.6 FTC inapplicable, because article 188.8.131.52.6, §2, al. 3, 1° FTC determines that there is no fictitious acquisition where the stipulation for the benefit of a third party free of charge (“AAB”) has been subject to gift tax.
The assurance gift is a well-known life assurance planning tool for Belgian policyholders. It has been advised and applied for a long time by estate planners, tax advisers, “big four” consultancy firms, reputed law firms and private banks that operate on the Belgian market.
New position n° 15133 dated 12 October 2015 & 30 November 2015 of the FTS regarding the tax implications of a life assurance gift
Nevertheless, on 12 October 2015 (amendment published on 21 October 2015), the FTS published a new position with regard to the tax implications of a life assurance gift. The Flemish Tax Service published an update on its position on their website on 8 February 2016. According to the FTS, the part of the assurance proceeds which relates to premiums paid by the initial policyholder will be fully subject to inheritance tax in the Flemish Region, irrespective of the payment of gift tax on the surrender value of the policy at the time of the assurance gift, and notwithstanding any change to the beneficiary clause following the assurance gift.
The FTS argues that article 184.108.40.206.6 FTC remains fully applicable, since they only take into account the initial policy, which constitutes a stipulation for the benefit of a third party (“AAB”). The FTS considers the change of such stipulation to a stipulation for oneself (“BAB”) as irrelevant. Therefore, any change to the beneficiary clause following the assurance gift (a precaution to reinforce the argument that following the assurance gift, the life assurance policy becomes a stipulation for oneself) will not affect the position of the FTS. According to the FTS, only the part that relates to any premiums paid by the new policyholder following the assurance gift will not be subject to inheritance tax. The FTS considers that the object of the assurance gift is different from the object of the payment by the insurer.
Furthermore, the FTS deems that the exception of article 220.127.116.11.6, §2, al. 3, 1° FTC does not apply where gift tax is paid following an assurance gift, since there is a difference between paying gift tax on the theoretical surrender value of a life assurance contract and paying gift tax on the actual assured capital once distributed.
Conclusion: quo vadis, FTS?
The decision of the FTS on the assurance gift is criticised by several law firms which are currently reaching out to the FTS to challenge these new positions. In addition, the topic of the FTS’s recent positions is under discussion by the Flemish Vice-Minister’s Office. Assuralia announced on 11 March 2016 that they have started legal proceedings before the Council of State against the new positions of the FTS based on the above-mentioned legal grounds. We can also expect legal proceedings from beneficiaries of an insurance gift who will be subject to inheritance tax of up to 65% in the Flemish Region. For example, in the case of a registered insurance gift to a brother, sister, nephew or niece, the beneficiary already paid 7% gift tax. According to the FTS, the life insurance proceeds this beneficiary will receive upon the death of the donor/life assured, will be subject to inheritance tax of up to 65%.
In the light of this, the life assurance contract clearly remains one of the basic tools of a well-developed estate planning, either to the next generation or between partners. The life assurance contract enables parents to give or pay the premiums, yet retain control. The increase of the withholding tax from 25% to 27% since 1 January 2016, further underlines the fiscal advantages of the lifelong exemption of the return generated each year from individual income tax, e.g. upon partial withdrawals or total surrenders. The progressive inheritance tax rates in Belgium can be as high as 80%, while the fixed gift tax rates for movable assets vary between 3% and 7.7%. A future increase of the gift tax for movable assets therefore seems more plausible than an increase of the inheritance tax. Furthermore, branch 23 unit-linked life assurance contracts offer considerable financial advantages. The policyholder can subscribe to a very wide range of funds with their own strategy and management, characterised by a potentially higher return on investment, ranging from very conservative to very aggressive, depending on the maximum return the policyholder wishes to achieve on his investments as a policyholder.
Should you have further queries on this development, please contact Tim Goethals or your usual Lombard International Assurance representative.