As a general rule, when the policyholder receives insurance benefits from an investment insurance, only the return on the insurance is taxable as capital income for the policyholder. However, under the special taxation procedure for certain insurances provided in 35 b § of the Income Tax Act, all the accumulated returns on the investment insurance are taxed to the policyholder as income for the tax year in which the returns were accumulated by the insurance company.
According to a recent decision by the Finnish Supreme Administrative Court the special taxation procedure was not applicable when the policyholder submitted requests for changes to the investment objects to the insurance agent. The case concerned whether a policyholder could submit requests related to the investment objects attached to an investment insurance to the insurance agent without losing the deferral advantage associated with the taxation of the insurance.
On March 30, 2022, the Supreme Administrative Court published its first public decision of the year, KHO:2022:41, regarding the application of the special taxation procedure outlined in 35 b § of the Income Tax Act. The case involved determining whether the special taxation procedure applies to the returns accrued from investment objects specified in a capitalization agreement. In the situation under review, the policyholder submitted requests to change the investment objects through the insurance agent, who then forwarded these requests to the insurance company.
According to the decision, the insurance company was deemed to have made the final decision regarding the change of the investment object. As a result, the policyholder did not have the required authority to issue instructions related to the insurance through a third party, which is necessary for the application of the special taxation procedure.
The special taxation procedure is regulated by 35 b § of the Income Tax Act. The application of this provision essentially means the loss of the deferral benefit, which is linked to investment-linked insurance under the Income Tax Act and is well-established in Finnish tax practice. The impacts on the policyholder’s taxation can be significant. Since this provision is relatively new, case law regarding its application is highly welcome.
The Finnish Tax Administration has launched a new oversight project focusing on insurance.
On March 21, 2022, the Tax Administration announced the initiation of this new project concerning investment-linked insurance. The investigation, conducted by the Tax Administration's grey economy unit, repeatedly references 35 b § of the Income Tax Act. It is expected that the application requirements of this provision will be one of the major issues in this oversight project.
The recent decision by the Supreme Administrative Court clarifies the situation for policyholders. In cases where the policyholder acts as the asset manager, the provision does not apply as long as the insurance company retains the final authority to approve the investment. The Supreme Administrative Court did not consider it significant that the insurance company's decision-making process was automated for investment options that had already been pre-approved by the company.
Based on our experience, for tax years prior to 2020, the Finnish Tax Administration's special focus appears to have been on the general anti-tax avoidance provision applied to insurance policies. However, from the tax year 2020 onward, the focus has clearly shifted to the application of 35 b § of the Income Tax Act. We continue to encounter related requests for clarifications and tax audits, indicating that active case law is being sought for the interpretation of 35 b §.
PreLex has assisted clients in several tax audits and clarifications related to the taxation of investment-linked insurance policies. We are happy to help with the interpretation of 35 b § of the Income Tax Act and any other questions regarding the taxation of investment-linked insurance policies.
