An intermediary recently asked a question in relation to a client who is an Irish national resident i...
The tax treatment would depend on whether the bond is issued by a company that has specific approval to do business in France. This is not easy to achieve if you are not a French insurer, even if you are based in another EU country. However, EU freedom of services provisions are becoming increasingly persuasive. The tax treatment of the bond gains on the policyholder's return to Ireland will also depend on whether the policy is one which is written from the Dublin International Financial Services Centre (IFSC policy).
There follows four courses of action the client could take. In each, the policyholder will have no liability to taxation, whether they are resident in Ireland or France, until benefits are taken from the policy, that is, the funds will benefit from gross roll-up.
(i) Non-IFSC policy, insurer not approved by French authorities: Surrender if the policyholder is resident in France. The policy gains will almost certainly be liable to income tax at the policyholder's marginal rate. If the proceeds are taken as a single lump sum, the policyholder can ask the increase to be treated as revenues exceptionnels. The tax is then calculated by adding a quarter of the proceeds to their other income and calculating the resulting increase in income tax. This is then multiplied by four. Surrender after resuming residence in Ireland. The gains are subject to capital gains tax and the rate remains a flat 40% for those policies or funds which are not domestic Irish or IFSC policies.
(ii) Non-IFSC policy, insurer approved by French authorities: If the policy is encashed when the policyholder is a French resident and the insurer has approval from the French authorities to market to French residents, the rate of tax due will depend on how long the policy has been in force (assuming the contract was issued after 1 January 1998). Policy held less than four years - 35% rate of tax due. Policy held between four to eight years - 15% rate of tax due. Policy held more than eight years - 5% rate of tax due.
These rates do not include any social surcharges (levied at 10%). Furthermore, if the policy has been in force for more than eight years, then the first Ff30,000 of gains for a single person and Ff60,000 for a married couple are exempt from tax. Tax if surrender made on return to Ireland:- as for (i) above.
(iii) IFSC policy, insurer approved by French authorities: Surrender while French resident, as in (ii) above. Surrender when Irish resident. On return to Ireland, the policyholder can either encash the policy, in which case no tax is payable, or keep the policy in force, in which case the contract is valued on the date of return and income tax is payable on any growth in value only for the period since the policyholder has been resident in Ireland. The rate payable will be the standard rate of income tax (currently 22%), plus an extra 3% to compensate for the gross roll-up. This will apply for surrenders occurring on or after 1 January 2001.
The insurance company is responsible for working out the tax payable and paying it on the policyholder's behalf.
(iv) IFSC Policy, insurer not approved by French authorities: Surrender whilst French resident, as in (i) above. Surrender whilst Irish resident, as in (iii) above.
Clearly, when it comes to taxation and distribution of investments and life assurance in Europe, there is no level playing field.
Brendan Harper is technical services consultant at Royal & Sun Alliance International Financial Services, Isle of Man
This article contains general information only and is not intended to be taken as specific investment or tax advice. Further information would be required.
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