Taxation of dividends paid to a foreign unit-linked life insurance

This article will discuss taxation of dividends paid to a foreign unit-linked life insurance contract. The purpose is to present a thorough review of the taxation as there is no legislation in place. this factor also poses some challenges from a methodological point of view. Nevertheless, this article approaches the problems of unit-linked dividends taxation by examining the recent case law and applying analogy.

The problems arising from the taxation of dividends paid to a unit-linked life insurance contract concern especially foreign life insurance companies’ possibilities for making certain deductions in accordance with the law on the taxation of business income. Finnish life insurance companies are able to deduct statutory transfers, which are related to meeting their obligations in respect of insurance liabilities together with sums necessary to satisfy those obligations, as well as sums which, in accordance with the principles governing the insurance industry, are necessary to cover their liabilities. Traditionally, foreign life insurance companies have not been able to make similar deductions in Finland.

Currently, the taxation of Finnish dividends paid to foreign life insurance companies is based on a preliminary ruling KHO 2016:77 of the Finnish Supreme Administrative Court. According to the preliminary ruling, the legislation and Tax Administration’s instructions, that apply to foreign pension funds, shall be applicable also to foreign life insurance companies. Although the ruling changed the taxation of dividends received by foreign life insurance companies in principle, the actual impact of the change is non-existent in practice. These companies are now able to make the aforementioned deductions through a special formula, which previously concerned only foreign pension funds. When utilizing this formula, the amount of the actual deduction constitutes only a fraction of the equivalent deduction available to the domestic life insurance companies. In the end, the special formula, the ambiguous conditions and especially narrow scope of application render the whole deduction practically meaningless.

Astonishingly, the current system can be still seen as discriminating against foreign life insurance companies, although the Court of Justice of the European Union has previously obliged Finland to change its legislation concerning pension funds for the very same reason. Because of this, the current system should be complemented with tax regulation explicitly applicable to foreign life insurances. Thus, the aim should be putting the foreign life insurance companies in the same tax position as their domestic counterparts.