On 14 October 2024, the Spanish Supreme Court issued two decisions overturning Galicia’s High Court judgments. These rulings confirmed that unit-linked contracts are legally considered life insurance contracts. Additionally, the Court concluded that, before 2021, unit-linked life insurance contracts without a right of surrender were exempt from Spanish Wealth Tax.
These two decisions, with identical content, relate to taxpayers who had taken out ‘mixed-term’ unit-linked life insurance policies, which include both survival and death cover. In these policies, the policyholder is designated as the irrevocable beneficiary in the event of survival, and his/her heirs are the irrevocable beneficiaries in the event of death.
Definition and Legal Nature
Firstly, the Supreme Court defined unit-linked life insurance as genuine insurance operations, rejecting the lower court's argument that these contracts should be reclassified as ‘mixed products’ with a predominant investment purpose. The Court emphasised that, despite their high savings and low-risk components, Unit-linked contracts are life insurance contracts as per EU Directives and CJEU case law.
Tax Implications
Secondly, the Court's decisions addressed the long-standing debate on whether unit-linked life insurance policies without a right of surrender should be taxed under Wealth Tax. According to Article 17 of Law 19/1991, life insurance policies were to be valued at their surrender value as of 31 December. The absence of a surrender value in certain unit-linked contracts had led to confusion and divergent rulings by administrative bodies and higher courts.
Despite administrative doctrine favouring non-taxation in the absence of a surrender value, some High Courts, like Galicia’s, had subjected these policies to Wealth Tax. They argued that the policy's asset value remained within the policyholder’s estate, affecting their wealth and economic capacity to pay.
Supreme Court's Conclusion
The Supreme Court has ruled that the true legal nature of unit-linked life insurance contracts must be linked to the valuation rule of Article 17.1 of the Wealth Tax Law. In the absence of a surrender value, no Wealth Tax is applicable for tax years up to 2020.
However, an amendment to Article 17 on 11 July 2021 now requires unit-linked policies without a right of surrender to be valued at their mathematical provision value as of 31 December each year.
These Supreme Court decisions provide much-needed clarity on the legal nature and tax treatment of unit-linked life insurance contracts in Spain. They establish binding jurisprudence for future interpretation and application of the law, customs, and general principles of law. Advisers should take note of these rulings to ensure compliance and optimise their clients’ tax planning strategies.
Ester Carbonell van Reck,
Wealth Planner – Spain, Portugal and LatAm