1 Introduction
As the public’s risk awareness matures, the use of insurance policies in Taiwan is becoming increasingly popular. To prepare for the unknown and diversify risk, it is common in Taiwan for the general public to purchase insurance policies, sometimes several.
According to Article 16 (9) of the Estate and Gift Tax Act “Insurance payment to the designated beneficiary at the time of death of the insured in life insurance or insurance for 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 could be a practical way to save tax on family succession planning. (There will still be alternative income tax issues, however. See below.)
It should be noted that from a tax point of view, the insurance payment is excluded in the taxable estate. However, whether the insurance payment is included in the genetic material from a civil law point of view are two different concepts. Regarding whether the insurance payment is included in the inheritance, Article 112 of the Insurance Act expressly provides: “If it has been determined that the insurance payment is to be paid to the designated beneficiary after the death of the insured, this payment is not included in the inheritance of the insured. “
In accordance with the above laws and regulations, if the deceased and the insured are the same person and a beneficiary has been specified in the insurance policy, then the insurance payment will not be included in the inheritance of the insured for both the purposes of tax law and civil law. It should be noted, however, that in current practice there are many cases where the National Tax Bureau still includes the insurance payment paid to the beneficiaries as part of the taxable estate according to the principle set out in Article 12-1 of the principle of material taxation in the Tax Collection Act .
The aim of this article is to discuss the following: (1) Are there any exceptions to Article 112 of the Insurance Act? In other words, is the insurance payment included in the genetic make-up in exceptional cases? (2) If the deceased used most of his property to pay the insurance premium before his death, the heirs who are not named as beneficiaries can assert that their rights (such as their mandatory partial right) have been violated ?
2. Taxation of the insurance payment and the principle of material taxation
(1) Estate and Gift Tax Act, Income Tax Act and Insurance Payment
Under Article 16 (9) of the Estate and Gift Tax Act, insurance benefits paid to the designated beneficiary are excluded from the taxable estate and it should be noted that under Article 12 (1), second subparagraph of the Income Tax Act, “insurance benefits paid to the beneficiary of a life insurance or receives a pension where the beneficiary and the applicant are not the same person and the life insurance and pensions are taken out after the entry into force of this Act The death of the insured person whose part of the payment made in a registration unit does not exceed NT $ 30,000,000, can be excluded from the basic income. “
The threshold of NT $ 30,000,000 has been increased to NT $ 33,300,000. That is, for life insurance or annuity where the beneficiary and the applicant are not the same person, the insurance payment should continue to be included in the basic insurance in the event of a payment after the death of the insured person in excess of NT $ 33,300,000 Income that would be taxable.
(2) Principle of material taxation
Under current tax practice, the “material taxation principle” should be understood to mean that, in order to achieve the purpose of tax laws, we should focus on the economic substance of transactions and the fairness of taxation, rather than relying on external law forms in interpreting tax laws and collecting taxes on the basis of the assignment of material economic benefits.
In order to facilitate the enforcement of the principle of material taxation, the Ministry of Finance has reaffirmed the common characteristics described in “Practical cases and reference characteristics in the application of the principle of material taxation when including insurance benefits in taxable estates” (reference number 2020-July-01 Tai-Tsai-Shuei-Zhi No. 10900520520 letter) and has provided a list of scenarios that contains the common features to which the material taxation principle would apply, such as: 1. Lump sum and high insurance premium; 2. Buying insurance policies at a very old age; 3. Purchase of insurance policies if a serious illness is diagnosed; 4. Conclusion of insurance policies immediately before the death of the insured person; 5. Very high insurance premium; 6. Buying insurance policies with borrowed money; 7. Purchase of multiple insurance within a very short time; 8. The total amount of the insurance premium plus interest is equal to or even higher than the amount of the insurance payment. etc. If several common characteristics are found in a given case, the principle of material taxation is applied.
Please note that the principle of material taxation only applies to tax collection and is not applied when it is decided whether the insurance payment should be included in the inheritance from a civil law perspective. That is, even if the insurance amount had been included in taxable assets by the National Tax Bureau under the material taxation principle under the current material taxation principle, under current practice the insurance payment would not necessarily be included in the inheritance to which the heirs are inherited can participate claim.
3. Life insurance payment, eligible part and mandatory part
Article 1225 of the Civil Code provides: “A person entitled to a compulsory part can have the amount of the deficit deducted from the inherited property if the amount of its compulsory part becomes deficient due to the legacy made by the testator. If there If it is in the case of several legacies, deductions must be made in proportion to the value of the bequests they receive individually. “
Article 1224 of the Civil Code provides: “A compulsory part is determined by deducting the amount of debt referred to in Article 1173 from the inheritance.”
If the property left behind by the deceased includes real estate, bank loans and life insurance payments made to the designated beneficiary (while the insurance premium was paid with the amount borrowed from the bank), then the inheritance is calculated in accordance with Article 1173 of the Civil Code The Code should contain both assets and debts . In this situation, in general, the bank loan should be included in (subtracted from) the genetic makeup. The potential problem is that the heirs who are not named as beneficiaries of the life insurance payment can claim that the insurance premiums paid by the testator are in breach of his mandatory portion because the testator “bought insurance policies with” very high insurance premiums and with borrowed money “?
It should be noted that in accordance with Article 1225 of the Civil Code, a person entitled to a compulsory part can deduct the amount of the deficit if the amount of its compulsory part becomes deficient due to the estate made by the testator bequeathed property.
Even if the insurance policies purchased by the deceased prior to his death are considered tax avoidance purposes and therefore the insurance payment may be subject to material taxation, it is still not a “legacy” of the testator. A deduction under Article 1225 of the Civil Code cannot therefore be applied.
Please note that the administrative court has made the following decision: “Pursuant to Article 112 of the Insurance Act and Article 16, Paragraph 1, Subparagraph 9 of the Estate and Gift Tax Act, the insurance payment to the designated beneficiary is excluded from the estate at the time of death of the life insured.
The purpose of such laws is that, given the testator’s intent in purchasing such an insurance policy, to ensure that the beneficiaries do not suffer the sudden loss of economic support, inheritance tax should not be levied on the insurance payment, or otherwise it would be Objective of the insurance to tax the insurance payment made to the beneficiaries. It is not intended to encourage or pamper people to take advantage of such laws to avoid the estate tax that should have been borne by the deceased’s estate.
Therefore, individuals 112 who buy insurance policies before their death in order to avoid inheritance tax based on the principle of material taxation, Article 112 of the Insurance Act and Article 16 (1) subparagraph 9 of the Inheritance and Gift Tax Act should not be applied .
(Decision of the Taipei High Administrative Court 2009-Su-Zhi No. 135, Decision of the Supreme Administrative Court 2011-Pan-Zhi No. 256）.
According to the above decisions of the Administrative Court, life insurance payments can be included in the taxable estate on the basis of the principle of material taxation. In addition, life insurance payments could be included in the genetic makeup as Article 112 of the Insurance Act does not apply in certain situations.
4. Conclusion
In summary, Article 112 of the Insurance Act, Article 16, Paragraph 9 of the Estate and Gift Tax Law and Article 12, Paragraph 1, Paragraph 2 of the Income Tax Law determine whether the life insurance payment should be included in the tax insurance, whether in accordance with the Estate and Gift Tax Law, inheritance from a civil law perspective the taxable estate should be included and whether it is calculated in the basic income of the beneficiary in accordance with the Income Tax Act.
While the Ministry of Finance has developed the principle of material taxation that could be applied to taxable assets, it should also be noted that the Administrative Court has made decisions where Article 112 of the Insurance Law may not apply in certain situations. If Article 112 does not apply, the insurance benefit can also be included in the genetic makeup.