Chile: Life insurances with savings are subject to taxation
For a significant amount of years, Chilean taxpayers have preferred life insurances with savings over other saving mechanisms. Until now, it was always understood within the market that no tax impact derived from this type of savings tool.
A life insurance with savings corresponds to an insurance, which offers a different benefit to the mere compensation concept of the death of the insured person. Usually, these kinds of insurances allow the contracting party (who usually is the insured person), any the following:
Choose where the savings are invested;
Perform withdrawals of the savings; and also
Receive all the saved amount with the corresponding profitability if a certain time frame passes without the insured risk being materialised.
As Article 17 No. 3 of Chilean Income Tax Law provides that any amount received by the beneficiary and/or the insured person as per a life insurance contract is non-taxable income, it was reasonably concluded that no tax consequences derived when any of them received a benefit from such a figure. As a matter of fact, life insurance generally compensates a damage that a certain person had suffered (i.e. the beneficiary of the insurance), then, if such damage indeed occurred and such is being compensated, it cannot be properly said that the beneficiary had an increase in wealth.
Recently, the Chilean Internal Revenue Service issued a ruling stating its criterion on the subject matter.
In the Chilean IRS's view, if a life insurance provides a compensation to the beneficiary due to the materialisation of the insured risk, it is actually covered by such non-taxable income treatment. However, if the insurance provides an equivalent to the savings and profitability at any event, then it is not covered by such non-taxable income treatment. Instead, such part may be treated as non-taxable income but based on a different provision, as the reception of a gift. In practice, this different qualification means that the savings and profitability, when received by the beneficiary of the insurance, is a gift, and as such, it is not subject to Chilean income tax, but subject to gift tax (i.e. a 25% tax rate).
The Chilean IRS also indicated that when the profitability is received by the same insured person, those are far from being a non-taxable income, falling instead within the concept of taxable income generated by a movable asset, and therefore treated as a wealth increase.
The Chilean IRS conclusions expressed herein are not expressly limited to insurances hired in Chile. Then, it could be the case that such are also applicable to foreign insurances.
It appears that the aforementioned criterion of the Chilean IRS may impact the interest of the market in this kind of saving products. However, in our opinion the analysis should be performed in a case-by-case basis, depending on the particular conditions of the insurance agreement, especially which the events that permit the beneficiary to withdraw the relevant insurance amounts are.