Reassuring the insured

Life assurance is the bedrock of any person’s financial plan, ensuring that assets are safeguarded and family members protected. Luxembourg’s ‘Triangle of Security’ system is designed as a gold standard for investor protection, and part of the country’s broader ‘protection for all’ principle.

The legal framework of Luxembourg’s life insurance sector incorporates three key elements:

• The regime protecting policyholders – the Triangle of Security.
• Protection against the bankruptcy of the insurance company.
• Protection against seizure of policy claims by third parties.

Triangle of Security

The Triangle of Security has been the foundation of Luxembourg’s position as a leading European centre for life insurance. It is a legal mechanism designed to protect the policyholder, creating strict controls over how their assets can be held and used. It is based on a tri-party deposit agreement signed by the industry regulator, the Commissariat aux Assurances, the life insurance company and the custodian bank – the three sides of the Triangle.

• The insurer must deposit all the assets linked to life assurance polices with an independent custodian bank. Policyholder assets must be segregated from those of the insurance company and of the bank itself.
• The regulator approves the custodian bank, and has powers of oversight, investigation and sanctions – including the power to freeze the assets of a life insurance company if it identifies a significant risk.

Protection against the insurer’s bankruptcy

If the insurance company runs into financial problems, the CAA may use its powers to protect policyholders from loss, for example by freezing the segregated accounts of policyholders and beneficiaries. This means no further transactions may be carried out involving the accounts without the regulator’s authorisation. It may also sell liquid assets or register a mortgage on fixed assets.

Policyholders enjoy a so-called Super Privilege – first-rank preferential rights over the assets held in separate accounts, giving them priority over all other creditors of the insurance company.

If there aren’t sufficient assets in the separate accounts, policyholders have additional privileged rights over the insurance company’s own assets – but only after legal and liquidation costs, employees’ claims and accident liabilities, plus those of the government and local authorities.

Protection against the seizure of policy claims by third parties

The rights to redeem, advance and pledge the policy belong exclusively to the policyholder and cannot be seized by a third-party creditor. If a policyholder has an unpaid debt, the creditor cannot seize the policy or force the holder to redeem it.

While policyholders’ creditors may seek redress from the insurance company to recover their claim, they will receive no payment unless the policyholder freely decides to redeem the policy.

Strengthening of the protection framework

This fundamental framework has recently been tightened even further with new rules that align protection with the policyholder’s risk profile and investment strategy. Whereas under the previous regime policyholders were treated equally regardless of whether they opted for a high-risk/high-return or a conservative investment strategy, now each policy is considered as an individual cell on which the super privilege is exercised, rather than the pool of all policyholder assets.

The changes illustrate how the authorities strive continually to ensure the maximum protection for Luxembourg life insurance clients. After all, life insurance is about Security and peace of mind whatever the future holds.

Key points:

• Luxembourg’s Triangle of Security is designed as a gold standard for investor protection in Europe.
• The regulatory framework provides protection against the bankruptcy of the insurance company and against claims laid against the policyholder by third parties.
• Under new rules, protection is personalised according to the policyholder’s profile and strategy.

To find out more, watch this video and consult our factsheet.

Overview and issues

On 20^th March 2018, the French and Luxembourg governments signed a new tax treaty (the “Treaty”). This new agreement is in line with developments in the BEPS (Base Erosion and Profit Shifting) project initiated by the OECD (“Organisation for Economic Cooperation and Development”). The renegotiation and complete overhaul of the treaty concluded in 1958 (and modified by four successive amendments) marks a desire to integrate the new international tax standards and bring them into line with the new model developed by the OECD in 2017.

Luxembourg and France have begun their internal ratification procedures. This process may therefore be finalised within a matter of weeks, and the treaty should, in all likelihood, be applicable as of 1^st January 2019.

Overview of the key measures

The main objective of this double taxation Treaty is obviously the resolution of potential double taxation in cross-border situations, but not only this. The spirit of the treaty is also clearly to combat potential situations of non-taxation, such as via double exemptions. In this respect, the preamble could be used to interpret the provisions of the different articles.

In addition, and unusually, it is accompanied by a significant new protocol emphasising anti-abuse measures.

Mechanisms to eliminate double taxation

Under the Treaty, double taxation is eliminated via tax credits, replacing the current tax exemption method.

The exemption method eliminates taxation in potential double taxation situations. For example, in the case of income earned in one State and paid to a resident of another State, the treaty will determine which of the two States is entitled to tax that income. In this situation, Luxembourg generally provides for the total exemption of that income from taxation if it is not deemed entitled to tax it under the double taxation treaty.

The tax credit method does not provide for exemptions, that is to say, for income earned in one State and paid to a resident of another State, the treaty will decide which of the two States is entitled to tax that income. The state entitled to tax the income will actually tax it. However, the other State will not lose the right to tax it. The income in question will be included in the taxable base of the person in the second State and that person receives a tax credit corresponding to the tax already paid in the first State.

This method is less advantageous than the exemption method and may lead to residual double taxation.

While the tax credit method is generally recognised under French law, this method is less common in Luxembourg, which is more likely to apply the exemption method.

The new method provided for under the Treaty may have implications at different levels, such as for French cross-border workers, residents receiving dividends that are not eligible for the parent-subsidiary scheme under domestic law (e.g. dividends distributed by a UCI (Undertaking for Collective Investment) to a Soparfi (holding company)), or for French residents earning director’s fees in Luxembourg.

2. Definition of residence and access to the Treaty

Until now, the concept of residence for legal persons has been based mainly on the concepts of “actual centre of management” and “registered office”.

In order to benefit from the provisions of the Treaty, you must be effectively taxable. Tax exemption or a very low tax rate may justify refusal of the status of resident within the meaning of the Treaty. From this point of view, not surprisingly, this merely reflects the modern interpretations of the concept of residence as well as the recent jurisprudence of the French Council of State.

However, paragraph 2 of the Treaty’s protocol gives UCIs (“Undertakings for Collective Investment”) established in one of the Contracting States that are similar to UCIs in the other State (on the basis of the latter’s domestic laws) access to the benefits of the provisions on dividends and interest for the rights held by residents of one of the two States or of any jurisdiction that has signed an administrative assistance agreement to combat fraud and tax evasion

3. Anti-abuse measures

This new treaty is worded in such a way that it communicates a clear desire to limit any misuse of its provisions. Thus, along with the notion of abuse of rights provided for in each of the States’ domestic laws, this new agreement recognises treaty abuse and allows the contracting States to deny access to the treaty for structures created principally for the purpose of benefiting from the treaty.

Through the insertion of this Principal Purpose Test (“PPT”) rule, the need for economic justification of the creation of cross-border structures is strengthened.

4. Definition of a permanent establishment

Here again, the Treaty extends the concept of permanent establishment, providing that a dependent agent acting on behalf of an enterprise situated in the other State, even without the power of signature, may constitute a permanent establishment if it is recognised that this agent played the main role leading to the conclusion of the contract. This role should be limited to preparatory and auxiliary activities. This new provision is of great importance for banks and insurance companies acting under the freedom to provide services.

5. Wealth tax

Under the new OECD model, immovable property forming part of a resident’s fortune will be taxable in the State where the asset is located.

On the combined reading of Articles 6 and 21, the Treaty could allow for the exoneration of a Luxembourg resident holding property in France through a company from the IFI (“Impôt sur la Fortune Immobilière” or real estate wealth tax).

6. Treatment of capital gains on disposals

Capital gains from the disposal of equity-related securities remain unchanged from the 2014 amendment, and are taxable in the State where the asset is located. What is new in the Treaty is that property dominance will now be analysed over the 365 days preceding the disposal.

Another important point: capital gains arising from a sale by a natural person directly or indirectly holding more than 25% of the capital of a company resident in one of the Contracting States may be taxed in that State if the seller has been a resident of that State at any time during the five years preceding the sale. It will be interesting to see how this provision of the Treaty articulates with the modifications to the French exit tax to be adopted under the budget bill for 2019.

7. Expansion of the concept of “dividend”

On the basis of the Treaty, the notion of dividend extends to everything that falls under the dividend tax regime in the distributing company’s State of residence. Consequently, income deemed to be distributed and other liquidation proceeds will fall entirely within the scope of the concept of dividends provided for in the Treaty.

The 15% withholding tax provided for in Article 10 remains similar to that provided for under the old treaty. The Treaty also grants an exemption from withholding tax on dividends paid by resident companies holding at least 5% of the capital of the company owing the payment over a period of 365 days.

What’s new relates to dividends distributed by certain property investment vehicles such as REITs (“Real Estate Investment Trusts”) or UCITS (“Undertakings for Collective Investment in Transferable Securities”), which will be subject to higher withholding taxes. Thus, a 15% withholding tax will be payable on dividends paid by such vehicles when the beneficial owner directly or indirectly holds a stake of less than 10% of the capital and 30% when the holding exceeds this threshold.

8. Interest

Interest income will no longer be subject to withholding tax; the previous treaty provided for a withholding tax limited to 10%. It should be noted, however, that the Treaty expressly excludes excess interest (that does not comply with the arm’s length principle) from this scheme.

The interest of the new treaty with regard to cross-border life insurance

Based on the above developments, it is interesting to note that the new treaty is generally more restrictive and less beneficial to residents of both States.

The Treaty could have a major impact on some asset structuring. Certainly, while the State where the property is located is entitled to tax it, the State of residence will still retain its taxation right and double taxation will be eliminated thanks to a tax credit in France.

However, this new agreement does not deal with cross-border life insurance plans and is even beneficial for French policyholders who have invested wisely in life insurance policies such as those offered by OneLife.

They will be able to take advantage of the group effect (due to the very large number of policyholders investing via OneLife) on taxation at source of insurance policy income, via:

the integration of a plan similar to the parent-subsidiary plan at the level of the Treaty that allows for the total exemption of dividends paid on life insurance policies from withholding tax;
the maintenance of the reduced withholding tax rate for ordinary dividends that cannot benefit from the aforementioned parent-subsidiary plan;
the elimination of withholding tax on interest paid on life insurance policies.

These provisions further increase the attractiveness of Luxembourg life insurance compared to other asset structuring mechanisms, particularly, but not only, with regard to immovable property.

And finally, life insurance has an additional advantage in terms of anti-abuse provisions because it is also an element of wealth transfer with an attractive tax regime.

Please note that the above developments are merely an overview of some of the provisions of the new Franco-Luxembourg treaty and that the practical impact of these measures will have to be evaluated on a case-by-case basis. OneLife’s experts are available if you have any questions.

Authors:

Fanny PERPERE – Wealth Planner

Jean-Nicolas GRANDHAYE – Corporate Counsel

Reform of the Belgian company law & the civil partnership (“société de droit commun”) …

Under the Companies Code Reform Act of 15 April 2018, civil partnership companies become simple partnerships, and new administrative and accounting obligations apply to them. Formerly praised for its discretion and simplicity, is it still viable as an essential and indispensable asset-planning tool?

1. The advantages of a life insurance corporate structure

Before setting to work enumerating the list of legislative changes made to company law for the Belgian arena, we must first situate how this code applies to the special area of asset planning.

One of the special structures mentioned in this context is certainly the civil partnership. Such a company is referred to as “a contract under which two or more persons agree to bring something into a community with the objective of carrying out one or more specifically determined activities and for the purpose of giving the partners a direct or indirect capital benefit” (i.e. distributing the benefits to the partners).[1] A civil partnership (now a simple partnership) has no legal personality, meaning that it is fiscally transparent. [2] Thus, the partners of a simple partnership are taxed directly on their share of the taxable income. Since the purpose of a simple partnership is the normal management of private assets, it is appropriate for them to not be subject to corporation tax, benefit from withholding tax, and not be taxed on capital gains or life insurance income.

There are several advantages to combining a company under ordinary law with a life insurance policy, such as avoiding income tax, avoiding the application of inheritance tax by means of prior donation, and (not least for the donor) maintaining control over the assets, all within a legal framework of discretion with respect to third parties.

2. The law of 15 April 2018… A minor reform?

The law of 15 April 2018 has profoundly changed the notion of an undertaking, for the purpose, according to the Belgian government, of achieving better uniformity and greater simplicity.[3] A company under ordinary law becomes an undertaking within the meaning of the Code on Economic Law, and is henceforth called a simple partnership.[4] This has several direct implications:

Obligation of transparency, information, and non-discrimination: now required to register with the Banque‑Carrefour des Entreprises (the Belgian register for legal entities), simple partnerships will be assigned a business number, which must be mentioned on every document they issue.[5] The simple partnership’s bank account number must also be mentioned on these documents.[6] As a direct result of this new disclosure of information, all kinds of information about simple partnerships will henceforth be publicly accessible via the Internet. This information will include, of course, the full names of the founders. Violating this registration obligation (and that of disclosure) will be punishable by a fine of up to €10,000.00.
Accounting obligation: simple partnerships are required to keep “(…) accounting books appropriate to the nature and extent of its activities (…)”. However, the accounts are simplified for simple partnerships with a turnover of less than €500,000 (amount set by Royal Decree).[7] Simple partnerships created from 1 November 2018 will be immediately subject to this obligation, and existing simple partnerships will not be subject to it until the next full financial year, starting on 1 May 2019.

At this point, it seems important to note that tax transparency and the automatic exchange of information have been gaining more and more ground every day. Under these new administrative obligations, Belgian taxpayers are now subject to a new disclosure requirement. But this disclosure is not absolute. In the current state of affairs, simple partnerships are not required to file annual accounts as determined by the Companies Code.[8] Discretion is thus always possible. But for how long?

That being said, effective asset structuring does not necessarily imply the use of a simple partnership with more complicated administration. The desired goals of exemption from income tax, avoiding inheritance tax, control and flexibility can be achieved via simple life insurance, combining foresight, civil expertise and fiscal knowledge.

For more information about this, contact OneLife’s experts.

Nicolas MILOS – Senior Wealth Planner

[1] Article 1 of the former Companies Code.

[2] Article 2 § 1 as amended by the Companies Code Reform Act of 15 April 2018, Moniteur Belge of 27 April 2018, to be taken together with Article 46 of the Companies Code.

[3] The entry into force of the provisions of this law was postponed to 1 November 2018.

[4] As proposed by Article 35 of the Companies Code Reform Act of 15 April 2018, Moniteur Belge of 27 April 2018

[5] Article 56 of the Companies Code Reform Act of 15 April 2018.

[6] Article 58 of the Companies Code Reform Act of 15 April 2018.

[7] Article III.85 of the Code on Economic Law as amended by the Companies Code Reform Act of 15 April 2018.

[8] See the new Article III.90, § 2 of the Code on Economic Law, taken together with Article 98 of the Companies Code.

Belgian reform of matrimonial and inheritance law

Through these two reforms the Belgian legislator has set out to profoundly modernise our civil code. Certain provisions dating back to 1804 were no longer adapted in any way to our current society. Individual liberty, fairness in handing down assets and the (re)composition of new families were at the core of these changes. The life assurance policy, an undeniable and acknowledged asset structuring instrument, could not be left out of these new provisions.

The beneficiary payment is henceforth part of the inheritance

To properly understand the effects of the new inheritance law, we believe it is essential to summarise the way the stipulation works for third parties within the life assurance policy. The policyholder notifies the insurer, using the beneficiary clause, that when the policy is cashed in, the insurance payment will be paid to the beneficiary designated by the policyholder. The policyholder’s stipulation in favour of the beneficiary is done free of charge when it contains no counterparty or obligation in respect of the policyholder in the person of the beneficiary.

The law of 31 July 2017 modified the return rules relating to donations and assimilated the third-party stipulation of a life assurance policy to a donation. Article 188 of the insurance law of 4 April 2014 has been rewritten to correspond to the new civil provisions and, since 1 September 2018, provides “that in the event of the death of the insurance policyholder, the insurance payment is subject to reduction and to return, in accordance with the Civil code”.[1]

The death benefit is henceforth part of the inheritance and enters into consideration in calculating the reserve and available quota. The policyholder may waiver from this return principle by expressly mentioning that the benefit from the insurance policy is granted by “preciput and by dispensing the beneficiary”. When the inheritance is opened, the beneficiary, dispensed of the return, must provide proof thereof.

Having said this, it should always be checked that the donations dispensing with the return remain within the limits of the quota which the deceased party may have at their disposal. Any donation made outside of this available quota opens the personal entitlement to reduction for any reserving claimant. The quota available has been set at half the inheritance and no longer varies depending on the number of children.[2] This provides for greater flexibility of action for those wishing to favour an heir or a third party within the framework of their future inheritance.

From common property to individual property

Even if the reform of matrimonial law appears insignificant in comparison to that undergone by inheritance law, the effects for existing or future life assurance policies are very interesting and are worthy of being detailed within the framework of this contribution.

As a reminder, every insurance policyholder holds a claim in respect of the insurance company to which are associated personal and individual entitlements. The policyholder exercises these entitlements alone if he/she is the sole owner of the policy. On the contrary, the policyholder will exercise these entitlements jointly in the event of a joint ownership with the other policyholder(s) who have taken out the life assurance policy with them. Since the policyholder’s rights are not extinguished on their death, it is necessary to determine the fate of these rights in the event of the prior death of a policyholder which did not terminate the policy. A clause increasing the entitlements between the policyholders may thus provide the desired solution, as may a post-mortem divestment to a said transferee.

To acquire these rights and initiate the policy, the policyholder is obligated to pay a premium, taken from their own assets or which may also come from a community of assets. By the mechanism of the life assurance policy, a premium paid by common funds becomes an undivided claim for joint policyholders or an individual claim in the event of an individual policy having been taken out. Certain civilians have for a long time railed against this situation, supported by the central tax authorities which also refused to acknowledge the life assurance policyholder’s individual rights and thus underlying investment rights.

The reform of matrimonial law has ended this debate by introducing the notion of “ownership and finance” and by definitively clarifying the use of common assets by spouses. In practical terms, a spouse takes out solely or the two spouses jointly take out a life assurance policy with sums originating from the community of assets.

At the death of the first spouse, the existing life assurance policy is not cashed in. The community of assets is dissolved and the surviving spouse is the sole policyholder. The common assets held by the deceased’s heirs incur impairment since the value of redeeming the policy is deducted therefrom. Accordingly, by way of compensation, the surviving spouse must pay a recompense to the community.

In terms of taxation, the positions vary from region to region. In Wallonia and Brussels-Capital, article 16 of the Code of inheritance rights supports the theory of the exemption of inheritance duty on the value of the redemption of the life assurance policy, provided that the spouses have at least one common child or descendant. In the Flemish region, the majority position supports the existence of taxation by virtue of article 2.7.1.0.6 VCF, not at the time of the death of the first spouse but at the partial or total redemption by the surviving spouse.

In conclusion, these two reforms have granted everyone greater liberty in organising their wealth and inheritance situation. In particular, an end has been put to the controversy relating to life assurance policies taken out by spouses married under the regime of community of assets. The door is henceforth open to new possibilities thanks, among other things, to the new inheritance pacts (comprehensive and occasional). The life assurance field will thus continue to change constantly, and Belgian legislation must, in particular, be monitored to preserve mastery of the benefits offered by this great tool.

Do not hesitate to contact us for further information.

Meanwhile, have a look at our #Success in #Succession e-book to discover the multiple benefits of what life assurance can offer as both an effective wealth planning tool and a solution to achieve success in succession.

Authors:

Nicolas MILOS – Senior Wealth Planner

Valerie VAES – Senior Wealth Planner

[1] Article 188 of the insurance law of 4 April 2014, as amended by the law of 31 July 2017 introducing the reform of the inheritance law, M.B. 30 April 2014.

[2] Law of 31 July 2017 modifying the Civil code in relation to inheritances and gifts and modifying various other provisions in this regard, M.B. 1 September 2017 (art. 46 and 47).

What is IDD?

As you are aware, the Insurance Distribution Directive comes into effect on 1 October 2018. In order to support your preparations, OneLife is making available to you various documents and procedures to help you gain a clear understanding of the new regulatory framework.

What is IDD?

Please find below a short video presenting the main features.

The main objectives of IDD are to:

Improve regulation of the retail insurance market and create more opportunities for cross-border activities;
Create the necessary conditions for fair competition between distributors of insurance products;
Strengthen consumer protection, notably regarding the distribution of insurance-based investment products (IBIPs).

What are the consequences for clients?

IDD requires distributors to provide clear and transparent information to enable clients to make informed decisions.

The main difference is that such information is now a formal requirement, to be provided via pre-contractual documentation incorporating a document designed to obtain all of the information about the client and to establish their profile and associated PRIIPs KID, in addition to all related charges (definition and nature of such charges). Once the information has been obtained, the client may decide whether or not to enter into the contract. This document will be made available to you in the very near future, should you wish to use it.

Following the signature of the contract and throughout its lifetime, distributors are obliged to monitor the evolution of all IBIP contracts and to verify that they remain suitable vis-à-vis the profile established during the pre-contractual phase. This process must be documented for the different transactions and subsequently annually, via an appropriate report.

IDD requires distributors to be able to substantiate all advice given to clients throughout the lifetime of their contracts.

What are the consequences for our partners?

Unlike the Insurance Mediation Directive, IDD concerns both Intermediaries and Insurance Companies.

Accordingly, business relationship agreements will be amended and must highlight the new obligations and duties incumbent on Intermediaries and Insurance Companies.

Distributors shall be required to act in the best interests of clients in an honest, impartial and professional manner.

This definition entails:

A strengthening of obligations regarding advice (Articles 20 and 30 of the Directive). For all products, distributors shall be required to establish their clients’ needs and requirements, extending right up to personalised recommendations for IBIPs. The objective of such recommendations is to offer a product that meets the previously established needs and demands, and which shall be arrived at by creating an investment profile incorporating a client suitability test and provision for periodic reassessment throughout the lifetime of the selected product. Documenting such assessments enables distributors to demonstrate that they are acting in clients’ best interests.
Transparent information (Articles 17, 18, 19, 20 and 29 of the Directive) regarding remuneration. Distributors must inform the client about all charges associated with the contract by setting out the nature of the charges and how they are calculated. Distributors and insurance companies must also avoid any situation that may undermine the quality of the service provided to the client. In other words, a parallel procedure covering the prevention, detection and management of conflicts of interest must be implemented by distributors and insurance companies. Should any such situation arise within the context of their activities, it must be notified to the insurance company without delay in order to try to find a solution. Should the situation persist, it shall only be disclosed to the client in the last resort, to enable the client to make an informed decision.
There is a new aspect vis-à-vis product governance and oversight (Article 25 of the Directive), allocating new roles to the various parties involved in the insurance universe: OneLife plays the role of Manufacturer of the products made available to its partners, who in turn play the role of Distributor.

Within the framework of this role as Manufacturer, a product creation policy and distribution strategy will be introduced, incorporating definition of the target market and a range of distribution channels which will be different for each product. All of this information will be forwarded to partners via the PDAs (Product Distribution Arrangements), which will be available in the very near future via Youroffice.

For their part, distributors must:

Communicate their distribution strategy to the manufacturer, to ensure that it is suitable for the manufacturer’s target market;
Monitor the products, in order to verify that they remain suitable vis-à-vis the realities in the market place.

All of these new obligations will be incorporated within the new agreement which you will receive in the not too distant future.

In summary, the following changes:

A model pre-contractual information form, available for your use;
Revised general terms and conditions;
Amended transaction documents, to enable you to document advice given prior to transactions;
The PDAs, to help you understand our target markets;
A new agreement meeting the requirements of IDD;
A new Appendix 1, covering remuneration that meets all of these new requirements

We will notify you as soon as these new documents are available on our systems.

Please do not hesitate to contact us should you require any further information.

Author : Nora Belarbi

VAT New features and key points

Whenever people speak to you about VAT, perhaps you find the topic daunting, and wish to change the subject to something more congenial.

You are right – in some respects, yet mistaken in others!

Like life assurance, VAT is seen as a complex subject that the layman has great difficulty in grasping. We are dimly aware that we pay VAT often and for just about everything. We have to admit that we don’t always know why we must pay this tax, and yet we pay it… Rightly or wrongly!

What is VAT?

VAT is a tax, Value Added Tax (TVA – Taxe sur la Valeur Ajoutée), a French invention introduced by that country’s legislation in 1954, and harmonised across Europe in 1967.

What is VAT for?

The French have a widely-used expression: “In France, we don’t have oil, but we do have ideas!“. It arose because State budgets are always under heavy pressure (except for Germany), and the French discovered this as an almost painless way of drawing large amounts of tax revenue into the public purse.

Tax revenues are of two types: direct taxation such as personal income tax (impôt sur le revenu des personnes physiques – IRPP) or corporate tax (impôt sur les sociétés – IS), and indirect taxation such as VAT or the tax on petroleum products, for example.

In France, in 2015, direct taxation (personal and corporate tax as previously mentioned) accounted for 25% (€69.5 bn) and 12% (€33.1 bn) respectively of tax revenues whereas VAT garnered tax revenues of €142.6 bn, equivalent to 51% of the total! And it all operates without your being aware of the fact.

It was this that persuaded the other European States to introduce a system on similar lines.

In Luxembourg, VAT was introduced in 1970 via the early VAT directives, while Belgium devoted an entire legislative code to the matter.

How does VAT work?

Value Added Tax is charged on value added. Let’s take the example of an everyday product, your morning coffee.

The coffee producer produces its coffee at a cost of €10, and sells it to a wholesaler for €20 net of tax (Hors Taxes – HT). The producer’s margin is therefore €10.

With VAT included (Toutes Taxes Comprises – TTC) and applying the French VAT rate of 20%, the sale price will be €20 * 1.2 = €24, with €4 including VAT collected by the producer and paid by the wholesaler.

The wholesaler sells the coffee on to a retailer for €30 net of tax, making a gross margin of €10. The wholesaler’s sale price is €30 * 1.2 = €36. Thus, he collects €6 in VAT after paying €4 in VAT to the producer.

He must therefore declare €6 in VAT collected less €4 in VAT paid = €2. Those €2 payable to the tax authorities represent 20% of the wholesaler’s value added of €10. Proved!

The system works all the way along the links in the production chain up to your purchase of coffee capsules. You are therefore the final payer of all the VAT paid by the professionals who process the product and for whom the tax is virtually painless. All they have to pay is the excess of VAT collected over the deductible VAT paid on the purchases they make.

What is VAT chargeable on?

On almost all products and services in your everyday life: your morning coffee, the purchase of the car or bicycle that takes you to work in the morning, or what you pay at the supermarket or cinema. VAT reaches everywhere and, paradoxically, you have become so used to it that you are no longer aware that it’s there.

What is the position for insurance?

Insurance activities are taxable services which very largely benefit from a number of exemptions. This lessens the cost to policyholders, once again making the insurance policy an invaluable component of wealth and inheritance planning.

In the normal course, the products and services supplied by OneLife should be included among taxable services. However, Article 44 of the Luxembourg VAT Act specifically exempts “insurance transactions (…), including the provision of services connected with such transactions by insurance brokers or agents”.

Thus, the services both of OneLife and of OneLife’s authorised broking partners are exempt. This is unfortunately not always the case for every insurance-related transaction. We shall review the matter in detail.

VAT and insurance – exempt transactions

In the same way as for the transactions of OneLife and its authorised broking intermediaries, other transactions are exempt and are included among the exemptions under the Luxembourg VAT Act, namely the following:

Trade in financial instruments
Deposits in cash by custodian banks (but not deposits of financial instruments)
Management of Collective Internal Funds, a new feature in 2017 marking good news for policyholders in reducing the fees paid by policyholders and improving the performance of these internal funds.

Unfortunately, however, not all transactions connected with insurance policies are covered by exemption.

VAT and insurance – transactions chargeable to VAT (=> “Vattable”)

Deposits of financial instruments by custodian banks, although such deposits enjoy a preferential rate known as the “parking rate”;
Management of financial instruments;
Management of dedicated Internal Funds and Specialised Insurance Funds;
Distribution of insurance products by intermediaries who do not have broker authorisation.

Thus, managing a dedicated Internal Fund is a taxable service, and VAT is assessed directly on the value of the Internal Fund.

Fortunately, the exemptions applying to most insurance transactions make this investment class far outweigh other wealth planning tools, particularly banking instruments.

And besides, VAT rates should be compared in order to be convinced of the competitive advantage of Luxembourg life assurance compared with its Belgian, French, Finnish, Danish or Swedish counterparts.

VAT rates applicable in Europe

In France, the standard rate of VAT is 20%, as against 21% in Belgium, 24% in Finland and 25% in Denmark and Sweden.

In Luxembourg, the standard rate of VAT is 17%, the lowest in the entire European Union! This is another incentive for life assurance policyholders to invest in a OneLife Luxembourg policy rather than in the policies of their own countries, in addition to the security, transparency and incomparable investment opportunities of the Luxembourg life assurance policy.

OneLife stands ready, alongside its partners and clients, to deal with any VAT-related queries concerning life assurance, or indeed any other queries.

Author: Jean-Nicolas Grandhaye

Is it possible for a Brazilian resident to hold a foreign life insurance contract?

In the Luxembourg insurance industry, we always face the question whether it is possible or not, from a regulatory point of view, for a Brazilian resident to hold a foreign life insurance policy. Hence, we believe it is appropriate to objectively address this query and lay out the regulatory scenario and tax consequences in this jurisdiction.

Brazilian regulatory framework

According to the general rule, individuals or entities resident or domiciled in Brazil can only contract insurance policies issued by companies duly incorporated under domestic legislation and registered with the local insurance authority (SUSEP). Hence, foreign insurance companies cannot perform, directly or indirectly, unauthorised selling or marketing activities in Brazil or issue insurance policies to policyholders resident in the Brazilian territory.

Bearing in mind the general rule, there is nothing in the Brazilian law that prohibits non-residents from contracting offshore insurance to the benefit of Brazilian residents. Given that Brazilian law adopts the principle of legality, according to which individuals or entities are allowed to enter into agreements not prohibited by law, this should be considered an agreement validly executed by two non-Brazilian entities and in full compliance with the laws of their country of residence.

In this context, there are strong arguments supporting the fact that an offshore entity, even if controlled by Brazilian residents, could contract foreign life insurance wherein Brazilian residents are insured persons or beneficiaries of the policy. This situation is not forbidden by Brazilian laws since a Brazilian resident is not contracting a foreign life insurance, but simply represents the risk covered by a foreign entity.

Attention should be paid to the fact that Brazilian authorities are currently more sensitive to transactions contracted by offshore structures for the benefit of individuals resident in Brazil and may disregard them if considered that a certain transaction has been artificially structured through offshore entities to avoid restrictions imposed by local laws and regulations on Brazilian residents.

Thus, a robust solution must be implemented in order to reduce risks that local authorities challenge the proposed structure in the future based on a substance-over-form approach. In this sense, foreign insurers should take into consideration factors such as: the pre-existence of a structure dully declared to the Brazilian authorities that was not incorporated only for the purpose of purchasing a life insurance policy; the fact that this structure is operational and/or has other types of investments; the corporate purpose of the offshore company is to serve as a holding and investment company; evidence of insurable interest by the offshore structure over the life assured; offshore company appointed as one of the beneficiaries of the policy etc.

It is important to mention that major law firms in Brazil have confirmed that, up to this moment, there are no laws, regulations or binding precedents allowing SUSEP to use the substance-over-form standard to disqualify legitimate agreements and structures governed by foreign law in territories abroad. Moreover, in their researches on administrative and judicial case law, they did not verify any decision challenging a similar structure, where a foreign legal entity or individual contracted an offshore insurance policy in which a Brazilian resident was the life assured or beneficiary.

What is necessary to qualify as a life insurance policy in Brazil?

Since a unit-linked insurance agreement is an international contract celebrated outside Brazil, it is important to compare it with the Brazilian concept of an insurance in order to determine the Brazilian tax and legal implications.

We must stress that such hybrid insurance policies traditionally offered by Luxembourg-based insurance companies are not usual in Brazil. The Brazilian life insurance business is dominated by simple term life insurance policies (which might have a one year validity term and do not accumulate cash value) or by pension products such as the VGBL (“Vida Gerador de Benefícios Livres”- which is treated as a life insurance policy for tax reasons). Therefore, it is of paramount importance to design a solution that legally qualifies as a life insurance policy in Brazil to avoid a tax requalification of proceeds as income arising from a typical foreign financial investment.

The Brazilian Civil Code provisions define an insurance agreement as one under which the insurance company, in consideration of payment of a premium, is obliged to cover the beneficiary’s interest in connection with insured risks related to persons or things. Moreover, to qualify as life insurance, the contract must guarantee an indemnification payment for future and unpredictable events, containing a significant death risk coverage that asserts the nature of a life insurance policy.

Therefore, if the contract is designed taking into account the above-mentioned requirements, proceeds received by Brazilian beneficiaries should qualify as an insurance indemnity under Brazilian Law.

Brazilian tax consequences

After qualifying as a life insurance policy, it is necessary to address eventual tax consequences that could be triggered in Brazil.

In case of death proceeds, the Brazilian Civil Code foresees that those are not considered part of the deceased’s estate. For this reason, Brazilian beneficiaries should be able to receive the referred proceeds shortly after the life assured’s death, without setting off an inheritance procedure. The settlement period should not exceed one month from the date of receipt by the insurance company of all the documents necessary for payment.

From a tax perspective, such proceeds would not be subject to inheritance/gift tax as the triggering event for such is the transfer of property or right resulting of succession or donation but not life insurance indemnification. Moreover, the Brazilian Income Tax Code sets out that the stipulated capital of a life insurance policy paid to a Brazilian resident as beneficiary is exempt from income tax. Furthermore, the Brazilian tax authorities have already recognised through a ruling that such exemption also covers life insurance policies contracted abroad, as long as the Brazilian insurance mandatory characteristics are dully observed. Hence, if properly designed, death benefits paid to Brazilian beneficiaries should not be subject to inheritance/gift tax and are exempt from income tax.

In case of proceeds arising from surrenders or maturity claims, since Brazil does not impose CFC rules on individuals, taxation would only be triggered once dividends are distributed to the shareholder or when a capital reduction/liquidation of the offshore structure takes place. In the first scenario, income tax would be levied at 27.5%. In the second scenario, individuals should assess the capital gain obtained and subject it to a progressive taxation ranging from 15% to 22.5%.

Given foreign exchange control rules in Brazil, remittances made in and out of the territory would trigger IOF exchange taxation. Usually, clients instruct insurance companies to deposit proceeds at their offshore bank accounts. If individuals wish to repatriate those amounts to Brazil, they would need to close a foreign exchange agreement at a Brazilian bank to return the financial availability from abroad (“retorno de disponibilidade”), which would trigger 0.38% IOF exchange taxation.

Brazilian tax developments

It must be stressed that Brazil is a jurisdiction that neither imposes CFC rules on individuals nor has properly regulated a substance-over-form doctrine. In this sense, there are plenty of tax planning opportunities to be explored and most Brazilians do structure their wealth through private investment companies located in tax havens. Despite the lack of political will to approve the necessary legislation, the Brazilian tax authorities have increasingly targeted offshore structures. Therefore, it is important to look at how the local administrative and judicial courts have been interpreting and admitting tax planning solutions.

Until recently, the limits of tax planning were based on the legality principle (negative limits of conduct). Nevertheless, the tax authorities have started to demand the existence of additional constraints related to business purpose (positive limits of conduct) in order to fill legal loopholes. Thus, they start to distance themselves from an analysis exclusively based upon the formality required by law towards the substance-over-form doctrine, under which the legal form of a transaction is levied according to its economic substance. So, if a transaction is arguably carried out with a certain degree of artificiality in a tax avoidance context, this transaction could have grounds to be challenged by the local tax authorities.

In order to prepare for this change of paradigm, we strongly advise our clients to take into consideration the relevance of business purpose and substance when designing long-term wealth structuring solutions.

Do not hesitate to contact us in case you need help with yours.

Taïza Ferreira

The British Expat and the offshore bond

In the wake of Brexit, there is a growing trend of British expats rushing to secure residency outside of Britain. This, it seems, is not limited to the British pensioner retiring to sunnier climes. Rather, under 55’s and millennials are opting for greater access to the continent; along with a better lifestyle, lower cost of living and greater financial freedom.

Regardless of age or motivations, efficient cross-border planning is key to a successful move. Furthermore, the globally mobile need their investments to be portable and tax efficient whilst also ensuring their estate plans go unhindered.

One investment in particular stands out as offering all of these features yet is free of convoluted planning and burdensome administration – the offshore bond.

The offshore bond

The offshore bond is an investment wrapper that affords the policyholder a diverse range of investment options, along with built-in flexibility to adapt to changes in individual circumstances, such as country of residence and attitudes to risk.

The bond is widely recognised globally – unlike other wealth structures such as trusts – and the law and regulations in comparison are relatively straightforward, making it an effective portable wealth solution.

The benefits

There are also a number of tax advantages, most notably the bond is non-income producing. As a result, it benefits from a gross roll up of the investment with a deferral of tax until surrender (or other chargeable event) – at which time the bond is subject to the income tax rules of the policyholder’s country of residence. This unique feature can give the policyholder unprecedented flexibility and control over when and where they pay tax on the bond. Switches can be made to the underlying funds without a capital gains tax charge. Therefore, the bond not only benefits from income tax deferral but also is not subject to Capital Gains Tax (CGT).

The bond is also an effective estate-planning tool. Dependent on the policy-holder’s country of residence, it may be possible to make assignments by way of a gift, hold the bond in a trust, or take out a capital redemption bond that can be passed on to a future generation.

Moving overseas

This succession and wealth planning vehicle is also a useful tool when moving overseas, for instance, to Spain, where a large community of British nationals live in mainly the seaside areas. As in the UK, Spain has in place a specific tax, legal and regulatory framework around the bond, which is fully complied with, both by the Insurers and the investors in order to ensure that the product is compliant, efficient and in line with the objectives agreed upon at the outset of the planning.

In this sense, it is worth mentioning that many British expats living in Spain have had some issues with their offshore bonds during their time there and that local courts have ruled on these products on several occasions in favour of the investors’ claims. For instance, one of the latest cases has involved an offshore insurer who was not duly authorised to distribute its products within Spanish territory and to Spanish residents (which includes British expats living in Spain).

At OneLife, we understand that offshore bonds must be fully compliant with the different markets in which our clients live. For this reason we work with locally qualified lawyers to tailor our bond to ensure compliance with the regulations in the relevant jurisdictions. In the case of UK expats moving overseas, this is no exception as OneLife offers the most suitable and compliant solution on a case-by-case basis and notably by taking into account the criteria of residence and nationality. In addition, OneLife makes available to its British expat clientele a full range of services which includes a local Sales team, tax and legal specialists and English-speaking Customer Services representatives.

Moving back to the UK

If after a period of time, a British expat decides to return to the UK, the bond will benefit from an annual 5% withdrawal on a tax-deferred basis, and time apportionment relief on surrender. This relief ensures that on surrender, the bond is only subject to UK income tax in proportion to the days of UK residence during the life of the bond.

We offer legal expertise, tailored bonds and additional support when the client moves, to ensure the bond remains compliant across borders.

For more information about this topic, please contact our experts.

Stacy Lake

All you need to know about GDPR

Why am I always being asked to stay in touch?

As of 25 May 2018, the GDPR comes into force and new obligations will apply to the collection, processing and retention of personal data

How many emails have you received in the last few months asking you to renew your consent to all sorts of newsletters? Unless you don’t have an email address and live in a cave, you should have received quite a few. Your banker, your insurance company, your financial advisor all seem to have passed on the word! Where does this sudden renewed interest in your opinion come from?

The answer is four letters: GDPR (the General Data Protection Regulation).

What’s the GDPR about?

This new European regulation comes into force on 25 May 2018. It aims to unify the way consumers’ data across the European Union is collected and processed, while reinforcing their rights, complete with dissuasive penalties in the event of non-compliance (4% of the business’ overall turnover or a Euro 20 million fine in the worst cases). It applies to all businesses that process personal data, from bankers to mechanics, sport clubs to Telecom giants.

Why GDPR?

In recent years, the digitalisation of our society has brought about major changes in the way we interact on the web and the online economy is largely fuelled by the personal data we put out there without too much thought. You’ve probably wondered why you receive emails from companies you have never contacted? Until today, companies’ privacy policies remained quite vague on how they would use the data they request from you, which enabled unscrupulous companies to use it for one or more purposes and transfer or even sell it to third parties without any particular regard for the consent of the persons concerned.

Today, with the entry into force of GDPR, citizens will gain various rights, such as:

The right to transparency as to the purposes of the processing of their personal data
The right to access their personal data and rectify it
The right to request that the data be deleted or that its processing be limited, for example if the person withdraws consent to the processing, if the processing is illegitimate or if the data is not necessary for the purpose of the processing.
The right to transfer their data to other operators

Companies will be required to facilitate the exercise of these rights by appointing a Data Protection Officer (DPO), who will be their single point of contact for any request relating to personal data protection.

OneLife has appointed a DPO who you can contact at: dpo@onelife.com .

Challenges for insurers and their partners

The different actors of the financial market will not only have to implement the various principles that underpin any processing of personal data, such as the principle of lawful processing, transparency and access to the data, but they must also be able to skilfully balance the collection of data needed to fulfil their various regulatory obligations with the principle of data minimisation and retention.

Because of regulations such as the Insurance Distribution Directive (IDD), which will apply to insurance intermediaries from October 2018, as well as the law of 13 February 2018 on the fight against money laundering and the financing of terrorism, a large amount of personal data must be collected, for clear and legitimate purposes, to obtain the required knowledge on the investor.

However, this data collection will follow the principles of GDPR, including:

data minimisation: it will be the broker or insurer’s responsibility to carefully establish where the need to collect this information ends so as not to gather more data than necessary
limiting the processing of the data collected to the sole purposes set out by these regulations. In other words, the data cannot be used for commercial purposes without the investor’s consent
retention of information, requiring that personal information is not kept for longer than necessary
data processing with the greatest care by applying robust security rules so that it is not subject to any breaches

OneLife stands by its partners to accompany and guide them through the implementation of these new obligations, and by its customers to meet their needs and promote their rights.

Major Shifts for Professional Secrecy in Insurance!

There has been a change in the professional secrecy that applies to all of Luxembourg’s insurance professionals, under the Law of 27 February 2018, to align itself with the country’s banking secrecy system.

It will now take greater account of the developments linked to the digitalisation and structuring of groups located in different jurisdictions.

This change was welcomed given the sector’s increasing digitalisation, as well as to ensure strict confidentiality and meet customers’ needs.

Why professional secrecy?

Professional secrecy is based on the same principle as medical secrecy, where the patient discloses confidential information to his/her confidant in complete trust. Similarly, customers have to reveal confidential financial information to their confident, be it their banker or insurer.

Professional secrecy was therefore developed for banks and insurance companies to guarantee confidentiality and gain customers’ trust in their key insurance partner.

Secrecy is also essential because of the intrinsic features of insurance contracts, especially when drawing up the beneficiary clause of which the beneficiaries may or may not be aware.

On the other hand, due to the sector’s digitalisation, it proved necessary to adjust secrecy in order to address new customer needs, for which OneLife already provides solutions (aggregators, digital onboarding, electronic documents and signing, etc).

What is professional secrecy?

Under Article 300 of the Law of 7 December 2015 on the insurance sector, professional secrecy in insurance is such that all insurance industry professionals “are required to maintain the confidentiality of the information entrusted to them during the exercise of their mandate or as part of their professional duties”.

This means that all conversations, documents, personal data and secrets disclosed by the policyholder, the insured life, the beneficiaries or any other person acting on the customer’s side of the insurance relationship, must be kept secret and strictly confidential by the professional receiving the information.

What if these professional secrets are revealed?

Any disclosure of information covered by secrecy – with the exceptions specifically provided for by law – may result in the penalties applicable under Article 458 of the Luxembourg Criminal Code. For medical secrecy, as set out in Criminal Code, the penalty is imprisonment from 8 days to 6 months and a fine of between €500 to €5000.

These penalties are relatively strict in order to deter anyone from betraying one of the most fundamental requirements of the insurance industry.

Who is professional secrecy for?

There are various individuals who are subject to insurance secrecy, as it applies to all professionals in the insurance relationship, including:

All natural or legal persons established in Luxembourg and subject to the control of the CAA (Commissariat aux Assurances) or of a foreign authority for insurance activities conducted from Luxembourg

This broad category naturally includes insurance companies, but also insurance brokers, insurance agents, branches of foreign insurance companies, etc.

Directors and members of governing and supervisory bodies
Managers and employees of the above-mentioned natural and legal persons
Insurance industry professionals experiencing difficulties and the individuals appointed to address them

Professional secrecy, geographical and temporal scope?

Secrecy applies to all insurance activities carried out either from the Grand Duchy of Luxembourg, or with the freedom to provide services from the same location.

In other words, an employee of an insurance company going to meet a customer or partner abroad for example is also subject to secrecy.

Moreover, Article 300(10) of the Law of 27 February 2018 establishes that “the violation of secrecy remains punishable after the termination of the mandate, employment relationship or exercise of the profession”, i.e. any disclosure of information even after the end of the person’s employment is still punishable!

Professional secrecy, exceptions prior to 27 February 2018

The exceptions laid down in the 1991 law were maintained unaltered in the 2015 law on the insurance sector, namely the following cases:

Where the disclosure of information is authorised or required by a legal provision (e.g. reporting under the Common Reporting Standard or NCD – ‘Norme Commune de Déclaration’)
To fulfil the commitments under the insurance contract in good faith
To prevent or control fraud (e.g. reporting suspicions to tackle money laundering)
To provide information to the sector’s regulatory authorities in the European Union where there are similar local professional secrecy laws to Luxembourg.
To provide information to the insurance company’ shareholders and partners to ensure it is “sound and prudent management”
To provide information between insurance companies, individuals working in the role of Insurance Sector Professionals (PSA – ‘Professionnels du Secteur des Assurances’), Luxembourg branches of foreign PSAs and individuals operating as Financial Sector Professionals (PFS – ‘Professionnels du Secteur Financier’) if said information is provided as part of a service contract (e.g. a business contract between a PSA and an insurance company)
To provide information to reinsurers and co-insurers
To provide information between entities in a financial conglomerate, although this is limited to information which must be subject to further reporting to the supervisory authorities
To provide information to approved brokers in Luxembourg, for customer data where the broker has acted as an intermediary.

New provisions and exceptions applying to professional secrecy

New exceptions are emerging, while others are being reformulated to:

align professional secrecy in insurance with banking secrecy
enable outsourcing within financial groups
meet new customer needs in relation to digitalisation

while maintaining confidentiality and the trust placed in the insurer, broker or PSA in Luxembourg as the customer’s confidant.

The new exceptions are:

A new exception which applies to reinsurers, pension funds and their employees and managers
A broader exception for insurers, PSAs and PSFs. Now all entities located in Luxembourg and regulated by the CAA, CSSF or ECB fall within the scope of exception, provided that there is a service contract between the two entities
Subcontractors of services provided by a regulated Luxembourg entity, provided that the customer has accepted the subcontracting, type of information transmitted and the country of establishment of the subcontractors, and that the provider is bound by professional secrecy or by a confidentiality agreement
A clarification in relation to the provision of information between entities in a financial conglomerate, in view of reporting to European authorities
The ability to provide information within a group to assess consolidated risks or to calculate consolidated prudential ratios

The law also provides that the provisions of Article 300 on professional secrecy are “without prejudice to the amended law of 2 August 2002 on the protection of individuals with regard to the processing of personal data”.

That is to say, the information provided is subject to professional secrecy AND to personal data protection, which is changing as of 25 May 2018 following the entry into force of the General Data Protection Regulation (GDPR).

The exception set out in point 3 is the most interesting, but also likely to be the most highly controlled. This exception makes it possible to meet the new needs of customers while ensuring – through professional secrecy at local level or a confidentiality agreement – that their information is kept confidential and used in complete trust by the subcontractor.

OneLife listens to all of its partners’ and customers’ questions about their obligations and rights in relation to professional secrecy and data confidentiality.

Article by Jean-Nicolas Grandhaye, Corporate Counsel at OneLife