Life insurance policies or annuities in favor of third parties, beware of indirect donations.

The recent action of the Italian Tax Agency has given relevance to a topic often underestimated and little faced by both the doctrine and the jurisprudence. We are talking about the issue of the taxation of the so-called “indirect donations” or “liberalities not donative”. 

  In fact, it has recently been reported that the tax Administration is sending out a large number of questionnaires regarding the possible requalification of life policies (usually unit or index linked ) as mere financial products. The abovementioned requalification produces a series of different effects on the taxpayer. Firstly, it has a great fiscal impact: with regard to the direct taxation, there is the risk to see taxed the part of the policy payout otherwise exempt from taxation and, with regard to indirect taxation, the sums invested in the policy could be included in the hereditament (consequently, at the moment of the policyholder’s death, they would concur in the formation of the taxable base for the purposes of the inheritance tax). Secondly, the requalification has significant effects from a civil-law point of view as well: on one hand, the financial products would be once again attackable by creditors, who could not seize the capital invested in a policy pursuant to art. 1923 of the Italian Civil Code, and, on the other hand, the policy values would be included in the inheritance and, consequently, they would be subject to reduction and collation. 

In this article, we will not specifically focus on the requalification and the requirements for his legitimacy, but rather on a different issue, which, although often ignored by taxpayers while responding to questionnaires, could nevertheless be relevant for the effects it is able to produce. Reference is made to the possibility that these policies, following a recent decision of the Supreme Court, are qualified as indirect donations and, consequently, subject to the inheritance tax under Legislative Decree no. 346/1990.

In this sense, it should be mentioned a recent decision of the Supreme Court (see Cass. no. 3263/2016), following which the designation of a third party as beneficiary of an unit linked policy can be considered an indirect donation if certain conditions are met. The conclusions of the Supreme Court, which refers to situations where the beneficiary is a person not bound by maintenance ties with the policyholder , are of considerable relevance, since the premiums paid are again subject to possible revocation actions (such as reduction and/or hereditary collation). 

Nevertheless, the point we want to raise is another: even where an indirect donation could be recognized, this conclusion should not automatically lead to subject the premiums paid to the gift tax.

In this regard, it should be remembered that, under art. 1, par. 4-bis and art. 56-bis of Legislative Decree no. 346/1990 , only the following “transactions” are subject to taxation:
  (i) the indirect donations resulting from deeds subject to registration;
  (ii) all the indirect donations that are alternatively:

• reported in declarations that the taxpayer makes in the contest of a tax assessment procedure (see art. 56-bis, par. 2). In this case, the premiums paid by the policyholder will be subject to taxation at the rate of 8% for the part exceeding the deductible provided by art. 2, par. 48 of the Law Decree no. 262/2006;
• subject to voluntary registration by the taxpayer under art. 56-bis, par. 3. In this case, the ordinary tax rates (4, 6 and 8%) will apply.

There is no doubt that, since life policies are not subject to registration, any indirect donations integrated by them would not be subject to inheritance and gift tax.

On the light of the above, it is necessary to pay attention to what the taxpayer may answer to the questionnaire of the Tax Agency. In fact, if the taxpayer suggests to the Tax Office that the policy can be considered an indirect donation in favor of the third party, this could allow the Tax Administration to apply the provision mentioned in the previous point (ii). It is necessary to point out that, since the requirement to tax the indirect donation is the self-declaration (in this case made in response to the questionnaire), only from that moment the five-year limitation period , after which the Office cannot tax the indirect donation, will begin to run.

Therefore, taxpayers should pay great attention when answering the questionnaires received with reference, in particular, to life insurance policies in favor of third parties. In fact, they must avoid both that the policies (indifferently unit or index linked) are requalified as a mere holding of financial products or are considered, following the declarations provided by the same taxpayer, an indirect donation subject to inheritance and gift tax.