Part 4: Wealth planning and reserved shares

In Belgium, the purpose of civil law reform on succession and donations was to modernise the inheritance framework of the Civil Code, dating back to 1804. The principles of these reforms have been applicable since 1 September 2018 and have had a major impact on donations and debt being brought back into the estate in order to respect the equality between the heirs and the respect of their reserved share (minimum share made available to each heir by Law). This mechanism is the so-called hotchpot.

A significant principle introduced by the aforementioned reforms is, without doubt, the modification of the so-called “reserved” and of the “available” share of the assets of any given person.

Notably concerning donations, Article 4.145 of the Civil Code specifies the children’s reserved share to be one-half of the total estate covered by Article 4.153 of the Civil Code, in the following terms: “Donations may not exceed one-half of the total calculation base set out in Article 4.153, if the testator on their decease leaves one or more children, or descendants thereof inheriting by way of substitution.”

It is therefore clear that any estate can be divided into two equal parts: the reserved share for the children (regardless of the number of descendants) and the available share of the Estate. This affects any donation that may have been granted, which will be allocated as follows:

  • To the available share: this is recognised as a privileged donation falling outside the scope of the share of the estate; or
  • To the reserved share: this is recognised as an anticipated inheritance.

 

Hotchpot applies to any heir who accepts their succession, with regard to the assets subject to hotchpot and in value (on the day of donation, indexed value). It is therefore entirely feasible for a donor to formally dispense the beneficiary of the donation from any hotchpot with the estate. The object of the donation therefore generally emanates from the available fraction of the donor’s assets. If this is not the case, action for reduction may be taken by a heir whose succession rights have been compromised (and did not receive his full reserved share).

The notable modifications to hotchpot of donations may be summarised as follows:

  • Hotchpot of a donation takes place on the basis of the value of the donated assets on the day of donation, indexed in line with the consumer prices index.
  • Hotchpot is conducted by value.
  • Hotchpot is conducted by “taking less” or by “paying a sum back to the estate”.

 

These new features may present a number of difficulties regarding financial asset planning. The value of a security will fluctuate between the day of donation and the date of hotchpot, i.e. the date of decease of the donor (opening of succession = moment of hotchpot).

 

Donation and the life insurance policy

Any donation conducted by a third-party stipulation in a life insurance policy is presumed to be subject to hotchpot (Art. 188 of the law of 04/04/2014), whereas the pre-reform situation was the reverse: the donation is assumed to have been conducted with exemption from hotchpot. These new principles apply to beneficiary clauses established or modified from 1 September 2018.

 

Practical case

Mr and Mrs Smith have 4 children, of which 2 are “good” children and 2 are “bad”. Mr and Mrs Smith’s assets are value at a total of €800,000, giving a reserved fraction of €100,000 per child. It is the parents’ firm intention for the “good” children to be favoured and for the “bad “children to receive the strict equivalent of their reserved share.

Mr and Mrs Smith are advised to take out multiple life insurance policies in the name of each child concerned, funded using donations of securities, each time with a non-transferability clause (which also affects the hotchpot value). The policies in the names of the “bad” children will not contain any stipulation that payment of the premium constitutes a privileged donation.

 

How can it be arranged for each to receive the proportion desired by the parents regardless of policy performance? Do the policy and civil law alone suffice?

 

YES – The policy beneficiary clauses will have stipulated for the “bad” children that there exists an express obligation of partial hotchpot in favour of the “good” children, such that any unanticipated policy gains will oblige them to place the entire policy in hotchpot for division with the “good” children. On the opening of succession, there will therefore be:

  • “Good” children policy: €300,000 each (having had poor returns)
  • “Bad” children policy: €200,000 each (having had good returns)
  • Total estate: €1,000,000

 

Conclusion

The parents’ wish was to ensure that the “good” children are favoured over the “bad” children and to restrict the latter to their reserved share, i.e. €125,000 each. The “bad” children’s policies will be placed in hotchpot on the opening of succession, each in the amount of €200,000. The “good” children also, yet without any division obligation provided the reserved fraction of the others is not compromised.

 

Want to know more about the opportunities offered by Luxemburg life insurance?

 

Nicolas Milos 
Maître en Droit, OneLife External Counsel, specialist in estate planning

 

New Danish-French double taxation agreement!

Are you a Danish resident? Do you feel like moving to France when you retire? What about your pension then? How can you best benefit from it while residing abroad?

The first thing to know is a Danish word that you’ll hear/read very often: “SKAT”.
This word has 3 different meanings in Danish:
Sweetheart/darling
Treasure
Tax
It’s of course the latest one which interests us: tax. The Danish tax authorities even named their website www.skat.dk.

Regarding taxes, do you know that, depending on your pension payments (amounts) on “Ratepensions” (annuity pensions), the income rate in Denmark is between approximately 40% and 52%?

Prior to 2008, there used to be an agreement to avoid double taxation so that Danish pensioners moving to France and residing in France only paid French taxes that were lower than the Danish taxes.

In 2008, the Danish tax authorities cancelled that agreement, which means concretely that as from 2008, when a Danish pensioner moved/moves to France, his/her pension allowances were/are taxed in both countries: in France and in Denmark! (double taxation). You can imagine that it kind of stopped Danish pensioners from relocating to France…

Now what?

In August 2018, France and Denmark started the negotiations for a new tax treaty to avoid double taxation.

As a result, in April 2019 they reached an agreement for the Danish pension allowances to be taxed only in Denmark. The Danish tax authorities would also take the taxes paid in France into account to calculate the Danish tax. The conditions are that the person/tax payer lives in France and is considered as a French tax resident.

The new double tax treaty will most likely come into force on 1st January 2021.

It’s actually a compromise between the worst tax situation that is now and the more favourable one that existed prior to 2008…

Moving/relocating or not moving/relocating to France…?

Does it mean that there is no tax advantage in moving/relocating to France when you’re Danish ? But what if you would still like to enjoy the sun in the South of France once you’ve retired? And if you have children and even grandchildren, would you like to leave something behind for them? To sum up, how to make the most of your pension?

Well, there is an attractive solution, even 2 …

The first one is to transfer all your pensions into only 1 Luxembourg bank account, thanks to OneLife.

The 2nd one is a OneLife Luxembourg life-assurance contract.

Luxembourg… ? You would think: “What does Luxembourg have to do with Denmark and France?”
Luxembourg is the leader in cross-border solutions in Europe. It is also a safe investment environment thanks to the “triangle of security” that protects your assets. And all this in full transparency and compliance.

OneLife is the only provider able to transfer all your Danish pensions to 1 single Luxembourg bank account:

Are you in a similar situation to this one?

… What if it could become this ?

 

Think of all the advantages you would have!

Not to mention that if, besides your pensions, you have other assets, why not have them in a life-assurance contract with 1 custodian bank and 1 asset manager of your choice who will follow an investment strategy?  A solution that’s flexible and answers your needs when you need money and if you want your family to benefit from it.

With the OneLife solutions, you (and your family) are in good hands.

Eager to know more?  Contact us!

 Torben Maj – Managing Director of ELPS –  European Life – and Pension Services TM Agent for OneLife 

 

 

Sources

https://www.skm.dk/aktuelt/presse/pressemeddelelser/2019/april/ny-dansk-fransk-dbo-vil-gavne-danske-virksomheder-og-pensionister-i-frankrig

https://europa.eu/youreurope/citizens/work/taxes/double-taxation/faq/index_en.htm

https://skat.dk

New tax laws approved by the Finnish Parliament

Parliament approved in April amendments to the Finnish Income Tax Act, which will change the taxation of life insurance and capitalisation contracts with effect from 1 January 2020.

As of the next tax year, profits of insurance products will be taxed proportionally in case of surrenders. Additionally, it will be possible to deduct possible loss when the contract ends, in other words, the total loss compared to premiums paid when the contract matures or is fully surrendered. Losses from partial surrenders are not tax deductible.

The taxation change is completely in line with the report of the working group that the Ministry of Finance appointed to look into harmonising taxation of different investment products. The report of the working group was published in May and it was generally hoped that new law would bring the long uncertainty to a close. 

However, the wording of the law leaves room for uncertainty and interpretation, especially when it comes to article 35 b of the law. The aim of this article was to put a stop to so-called “artificial insurance structures”, but has raised more questions than it has given answers. To keep the tax benefits of their insurance solutions, from next year onwards, policyholders are not allowed to enter any agreements with third parties, which means that all asset management and advisory agreements must solely be made between the insurer and the third party in question. In case the policyholder wishes to influence investment decisions of his insurance portfolio, this is possible, but the orders need to be given to the insurer instead of the asset manager.

The asset management industry, both domestic and foreign insurance companies have to streamline their procedures and documentation in order to comply with new laws and regulations in Finland.  At OneLife, we have already started mapping the changes needed as we want to ensure that we continue to offer compliant solutions for our Finnish clients, now and in the future.

Should you have any questions concerning this topic, please contact us.

  Tarja Valkeinen
Country Manager – Finland

 

The accretion clause according to VLABEL

The accretion clause is, in legal jargon, defined as an onerous commutative and aleatory contract. As the contract presupposes at least two parties, it follows that the survivor has the chance to acquire something under the condition precedent of the co-contracting party’s death. The majority of legal literature states that the accretion agreement is based on two balanced conditions precedent.

The reason for this is simple: each party to the agreement assigns to the co-contracting party their joint interests in a (movable or immovable) property under the condition precedent of their predecease.[1] Consequently, when a specific event occurs (we will be talking about death in the context of this contribution), the share of one of the (predeceased) joint owners shall be acquired ex lege by the second.[2] The chances of gain and of loss of each of the joint owners depend on an uncertain future event, which is beyond the control of the parties.[3] This uncertainty lies not in the death of the co-contracting parties (a certain future event) but in the chronological order of the deaths of the joint owners.

It should be noted that, logically, the accretion clause implies the pre-existence of a joint ownership, i.e. jointly-owned property acquired by spouses married under the regime of separation of property. [4] For an application to life insurance, this criterion will naturally lead us towards a joint application.

As a reminder, a joint application for a life insurance policy implies a joint ownership created between the various policyholders of the same life insurance policy. In fact, the personal rights to the contract (attached to classification as a “policyholder” in the life insurance policy), i.e. right of redemption, right to change the beneficiary clause, arbitration[5], shall be exercised jointly by the joint applicants. This accretion agreement is independent from the legal practice on which it is based. Consequently, it may be entered into after conclusion of a life insurance policy, for example.

1. Legal conditions governing the validity of an accretion clause

As stated above, the accretion clause is an onerous commutative and aleatory contract. We may therefore deduce from this the conditions governing the validity of said clause.

  • Onerous agreement: Article 1106 of the Civil Code states: “the onerous contract is that which subjects each of the parties to give or to do something”.[6] We may therefore conclude that each of the parties receives a reciprocal “chance” to receive something (the other’s undivided share). This classification as an onerous agreement is important, as it thus avoids classification as a gift (which would then be potentially restored to the succession and subject to reduction when a question of succession arises).
  • Aleatory agreement: the aleatory and commutative nature of the agreement is considered as a sort of equality of opportunity, for each of the parties, to gain wealth. The conditions governing loss or gain in this sort of “gamble” must therefore be equivalent for each of the parties. Consequently, this implies:
    • That the contribution of each of the parties must be equivalent
    • That the chances of survival of each of the parties must be equivalent.

What happens if there is economic imbalance between the parties’ investments? It is recognised that such an imbalance does not call into question the uncertainty underlying any accretion agreement provided that the parties have equal chances at the outset. This is determined in light of actual circumstances, and therefore involves compensation. Is that feasible? A distinction should be made according to the region in question.

  • In the Brussels and Wallonia regions, this compensation is entirely feasible. Case law precedent, which is flexible in such matters, seems to allow it.[7]
  • In the Flemish region, VLABEL’s standpoint of 8 January 2018 states that life expectancy as well as one’s own contribution are concepts that cannot be compensated for. As this standpoint is open to criticism, security wants it to be respected in order to avoid any dispute.[8] Any request by the client to go against this standpoint in FLANDERS shall be subject to an analysis by and information from an external specialist consultant.

2. Accretion clause taxation – VLABEL version

With jurisdiction over inheritance tax and certain registration duties since 1 January 2015, the Flemish Region (Vlaamse BelastingDienst or “VLABEL”) is responsible for determining, auditing and collecting or refunding inheritance taxes and registration duties. VLABEL’s jurisdiction is based on the establishment, in the Flemish Region, of the tax residence of inhabitants of the Kingdom or, regardless of the tax residence of the concerned taxpayer, of a real estate property.

The issue that is of particular interest to us at this stage is the application, or otherwise, of Flemish inheritance taxes in the context of a joint life insurance policy (last-to-die configuration) with an accretion of the surviving policyholder’s rights (from the share of the predeceased’s policyholder’s rights) upon the first death. In various decisions, VLABEL has explicitly acknowledged that the accretion agreement is proving to be an effective tool in the context of inheritance optimisation, confirming the non-taxable nature of an accretion for rights relating to a life insurance policy.[9] However, VLABEL does not agree with regard to the sums assigned to the surviving policyholder in return for these rights, i.e. as soon as an insurance benefit occurs (redemption or liquidation of the policy). Consideration should therefore be given to the very basis of this standpoint of VLABEL: the distinction between the rights obtained under the (onerous) life insurance policy and the sums required by virtue of the exercise of these rights (exercise of the right of redemption which would be free of charge). Here is the source of the problem, and the majority of legal literature also disputes this distinction, which is described as artificial. By applying the law literally, there should be no taxation in the situation referred to provided that the accretion agreement is valid.

VLABEL has made a number of contrary decisions, and an official written confirmation would be desirable on this subject. This would put an end to any controversy.

For more information on this subject, please do not hesitate to contact our experts.

Nicolas MILOS – Senior Wealth Planner

 

 

   

[1] See the contributions on this subject of M. VAN MOLLE, D. MICHIELS, F. WERDEFROY or H. CASMAN.

[2] H. CASMAN, Notarieel Familierecht, Gand, Mys & Breesch, 1991, p. 183.

[3] Articles 1104 and 1164 of the Civil Code.

[4] E. DE WILDE D’ESTMAEL, “Appendix 2 – Accretion, survivor’s benefits and hotchpot clauses in the context of gifts of transferable securities”, in Les droits de succession et les droits de donation (Inheritance and Gift Taxes), Brussels, Larcier, 2014, p. 240.

[5] Article 169 et seq. of the law of 4 April 2014 on insurance, M.B. 30/04/2014.

[6] Article 1106 of the Civil Code, in force on 13/09/1807.

[7] Antwerp, 10/02/1988, T. Not., 1989, p. 320, Rev. Not. b., p. 437; Civ. Turnhout, 7/01/2005, C.A.B.G., 2006/6, p. 60.

[8] VLABEL, Standpunt No. 17044.

[9] See inter alia advance ruling BB 17046 of 19 February 2018.

Club Patrimoine - Interview avec le COO de OneLife

Interview with the new OneLife CCO

Romain Chevalier, the new OneLife CCO, is interviewed by Bogdan Kowal of Club Patrimoine.

Club Patrimoine is a French social network of asset management professionals.

In it, Romain Chevalier presents OneLife and speaks about its acquisition by APICIL in January 2019 as well as the ongoing projects and news.

The place held by Luxembourg life assurance on the French market is also discussed, as are the various wealth solutions that OneLife can offer and their benefits.

Check out the interview to find out more.

 

Invest in Life!

Diversification.  Customisation.  Flexibility. 

A Luxembourg life assurance policy offers a wealth of opportunities when it comes to investments.  Investors can choose from a large range of external funds managed by some of the world’s best fund houses.  And, for a more personalised approach, internal funds offer access to specialised solutions too.  Combined within the security and flexibility of a life assurance policy. 

Find out more about how investments can optimise your wealth! 

Watch our video below

 

Pledging life insurance policies as security

The following people all have something in common.

Can you spot what it is?

  • Mr Martin, a French established business owner, has a savings policy through his company and would like to arrange a bank loan for the company.
  • Mr and Mrs Peeters, a retired couple from Belgium, have an endowment policy, of which their children are the beneficiaries, and they are looking for a loan to buy the house of their dreams without having to surrender their policy.
  • Mr Larsson, a doctor from Sweden, has an endowment policy, of which his wife and children are the beneficiaries, providing unrivalled protection of Luxembourg life insurance policies offered by OneLife. He wishes to pledge his policy as security to help one of his children to buy a flat.

As you have no doubt noticed, all these people wish to use their endowment or savings policy as security for a loan, bank or otherwise, for themselves, their company or one of their close relatives!

So, why and how do you pledge a life insurance policy as security?

Is it possible to pledge the policy’s underlying assets as security, or must the people in the above examples surrender their policies?

What are the mechanisms for pledging an endowment or savings policy as security?

First, it is important to note that, due to the Triangle of Security, there can be no lien of whatever kind on the underlying assets of a life insurance policy. Any lien must either be on the policy itself (where an endorsement to the policy is required) or on the claim held by the policyholder with regard to the insurance company (where an endorsement to the insurance policy is not required).

Thanks to the Triangle of Security, the assets held within a Luxembourg endowment or savings policy are separated from the insurance company’s other assets. By virtue of article 3 of the tripartite deposit agreement between the insurer, custodian bank and Insurance Commission, neither the bank nor the insurer can accept privileges or liens other than a super privilege on the underlying assets! => Here!

Extract from article 3 of the deposit agreement template produced by the Insurance Commission:

“the assets deposited […] must be separated from the depositor’s other commitments and assets with the credit institution […] and may not be offset with the latter. There can be no privileges or liens other than those provided for by article 118 of the law [super privilege] on the assets deposited. 

Notwithstanding any provision to the contrary contained in the general terms and conditions or other contractual documentation between the credit institution and the depositor, the credit institution recognises this separation and prohibition of offsetting. “

Consequently, there can only be a lien at a level above the assets deposited, that is to say, on the policyholder’s policy or claim:

The acceptable mechanisms for attaching a guarantee are as follows:

  • Assignment of rights
  • Designation of a beneficiary
  • Pledging the life insurance policy as collateral
  • Assignment of the life insurance policy

1. Assignment of rights for endowment or savings policies

Commonly used in Belgium, the assignment of rights is governed by articles 183 and 184 of the Law of 4 April 2014 on insurance:

Art.  183. The rights under insurance policies may be assigned in whole or in part by the policyholder. This assignment right cannot be exercised either by the policyholder’s spouse or creditors.

In the event that the benefit is accepted, the assignment right can only be exercised if the beneficiary agrees.

Form

Art.  184. All or part of the rights under the policy can only be assigned if an endorsement is signed by the assignor, assignee and insurer.

However, the policyholder may stipulate in the policy that on his death, all or part of his rights will be assigned to the person designated to that effect.

The assignment of rights is similarly governed by article 118 of the Luxembourg law on insurance policies, which is based on Belgian law.

In French law, the assignment of rights is governed by article 1216 of the French Civil Code. However, French law prohibits the assignment of rights for endowment policies. Rights under savings policies can however be assigned in French law!

The person wishing to assign his rights is known as the assignor. He can assign his rights to a third party, the assignee, free of charge (donation) or for a consideration (in exchange for a service, a bank loan for example) in the following 3 ways:

  1. assignment of all the rights under the insurance policy and transfer of this policy to the assignee, for example his children or, in consideration of a loan, the lending bank;
  2. assignment of all the rights under the insurance policy, without the policy being transferred;
  3. a partial transfer of the rights under the policy.

The rights under the policy may be assigned in whole or in part. For example, the following rights may be specifically assigned:

  • the right to change the investment allocation among the investments linked to the policy;
  • the right to designate the beneficiary;
  • the right to surrender the policy;
  • the right to pledge the policy;
  • the right to information on an annual basis or from time to time.

In the event that a right is assigned to more than one person, the assigned right will be exercised jointly by the assignees.

However, this assignment of rights means that the assignor automatically loses the assigned rights, which can be difficult to accept for some policyholders. Likewise, the beneficiary must expressly approve the assignment of rights.

In practice, the partial or total assignment of rights, with or without transfer of title of the policy, is very common in Belgium but seldom or never used in other markets (such as France for example).

2. Designation of beneficiary as a guarantee

A third party can be designated as first-ranking beneficiary of the insurance policy as a guarantee for a debt owed by the policyholder to a bank or any other third party.

By way of illustration: Mr and Mrs Peeters would like a bank loan in order to buy the house of their dreams in Tuscany. Since the house is not located in the country where the bank is established, the bank demands a solid guarantee in addition to the standard repayments under the loan agreement.

Mr and Mrs Peeters are therefore going to designate the bank as first-ranking beneficiary of the life insurance policy as a guarantee for the loan to buy the house of their dreams. The bank is going to accept the benefit in order to secure its position and the claim pledged as collateral for the loan.

In practice, this mechanism requires the policyholder to designate the bank as accepting beneficiary and, therefore, the policyholder loses the right to designate a new beneficiary and must ask the accepting beneficiary’s agreement for any future transaction.

3. Nantissement of the insurance policy

Another possibility is nantissement, a mechanism used in France, which is equivalent to attaching a lien on the insurance policy. Nantissement is a type of pledge, that is to say, a charge on moveable property applied to an intangible asset, for example shares or a life insurance policy.

French law makes a distinction between nantissement and a pledge (gage), which, in French law, applies to tangible assets (property that a person can hold in their hands).

Nantissement is provided for in article 2355 of the French Civil Code and is defined as the contract by which the debtor gives possession of an intangible asset to its creditor as security for its debt.

By using nantissement, a debtor can grant a lien on its endowment or savings policy since the policy is an intangible asset (a contract representing a claim of the policyholder on the insurance company).

In Luxembourg as in Belgium, the term used is the term “pledge”, but the mechanism is the same, and an endorsement to the insurance policy signed by the insurer, policyholder and bank is required.

Articles 116 and 117 of the Luxembourg law of 27 July 1997 on insurance policies states that the right to pledge an insurance policy is a personal and exclusive right of the policyholder. However, in the event that the benefit is accepted, the prior consent of the beneficiary is required.

Moreover, the provisions of the Luxembourg law are based on Belgian law, including articles 181 and 182 of the Law of 4 April 2014, which states:

“Right to pledge the policy

Art.  181. The rights under the insurance policy may be pledged; they may be pledged only by the policyholder and not by his or her spouse or creditors.

In the event that the benefit is accepted, the pledge is subject to the beneficiary’s consent.

Form

Art.  182. A policy can only be pledged by means of an endorsement signed by the policyholder, the secured creditor and the insurer. “

Nantissement is a separate contract, but requires an endorsement to the insurance policy. The law that applies to nantissement is the same law that applies to the life insurance policy. In practice, nantissement is allowed, but it is less used than assignment of claim because it is subject to a specific regime governed by the law applying to the insurance policy.

Nantissement is therefore less flexible and gives less protection both for the policyholder and for the bank, in particular compared with the assignment of claim (described below), which is the most commonly used mechanism for pledging a life insurance policy as security. According to the law applying to the insurance policy itself, nantissement is subject to the legal, regulatory and jurisprudential regime applicable in the law of the policy.

4. Assignment of claim

The term may appear obscure for the layperson, but assignment of claim is the mechanism of choice for pledging an endowment or savings policy as security.

The policyholder has rights under the policy, and the first of these rights is not a right of ownership on the policy or assets (contrary to popular belief), but a right of claim, that is to say, the policyholder has the right to be paid the policy’s surrender value. The insurance company therefore has a debt it owes to the holder of the policy, and the assignment of claim operates at the level of the policyholder’s claim and not at the level of the policy itself, which is the case for nantissement.

To summarise the situation of the policyholder and insurance company once the insurance policy has been effected:

The mechanism of the assignment of claim is provided for in article 1275 of the Luxembourg Civil Code:

“The assignment by which a debtor provides the creditor with another debtor, who has an obligation to the creditor, does not operate by novation unless the creditor expressly declares that he intends to discharge his debtor who made the assignment. “

Through the mechanism of assignment of claim, the policyholder obliges the insurance company to repay the lender (usually the bank, but not always the case) in the event that the policyholder defaults. Therefore, the bank has a second debtor to call upon should the main debtor default.

Similarly, the debtor and assignor (policyholder) do not have to be the same person, and a person can assign its claim for a debt that has been contracted by another person.

For example, Mr Martin, the established business owner from France, may assign his claim on his personal policy for a debt contracted by his company. As for Mr Larsson, he may assign his claim on his policy as security for the debt contracted by his son to buy a flat without surrendering the policy.

Only if Mr Larsson’s son or Mr Martin’s company defaults may the bank collect on the guarantee and demand to surrender the policy in whole or in part, which in no event may the insurance company refuse because of the assignment contract – within the limit of the sums due by the debtor (that is to say Mr Martin’s company or son) and the surrender value of the life insurance policy.

Moreover, the assignment of claim does not require an endorsement to the life assurance policy, and it is very common for an assignment of claim under Luxembourg law to be used, which may cover all the existing and future debts of a given debtor.

Finally, the regime of assignment of claim is the most flexible and by far the most used in practice.

Once the debt has been repaid in full, the bank or third-party lender releases the assignment, and the policyholder regains the rights that were limited by the assignment. Therefore, designation of a beneficiary and nantissement (lien), but also assignment of claim, do not mean the policyholder loses its rights, contrary to the assignment of rights which, in order to be lifted, requires that the rights are assigned back to the policyholder.

Each of these methods for attaching a lien on a life insurance policy has its advantages and drawbacks. It is worth noting however that assignment of claim has the most flexible regime that is best suited to a large number of situations and does entail the policyholder losing his rights, but just a temporary limitation of those rights.

The tripartite assignment can be summarised as follows:

Want to know more? OneLife’s experts are here to help offer you and your clients’ wealth solutions.

Please speak to your OneLife contact, who will be pleased to help.

 

 Jean-Nicolas GRANDHAYE, Corporate Counsel at OneLife 

FARAD Finance Forum 2019 - OneLife

FARAD Finance Forum 2019 – #FFF19

Wealth and tax planning was an important subject for the Spanish market during the course of 2018. Fuelled in part by the government’s proposed tax measures as part of its provisional budget for 2019; measures that could have had a significant impact on high net worth individuals. These measures included, for example, rises in marginal rates of tax on personal income and savings, an increase in the marginal rate of wealth tax and aggressive tax measures (including in connection with the transposition of the Anti Tax Avoidance Directive, or ATAD). What’s more, the government’s proposed measures seemed to target instruments used as vehicles for financial and property investment for high net worth individuals and sophisticated investors, such as SICAVs (open-ended investment companies) and SOCIMIs (listed real estate investment companies).

Even if the current government failed to obtain approval for its 2019 budget and associated tax measures, it is worth speculating on the tax measures that could be adopted if the political parties that support the current government were to obtain a sufficient majority in the Parliament and/or Senate when the next elections are held in April 2019.

 

Against this background, life assurance maintains its appeal as instrument of choice, not only for Spanish high net worth individuals, but also for expatriate customers, who have moved to Spain and wish to manage their assets with a view to planning for their family and the transfer of these assets from one generation to the next, while complying with the applicable laws and regulations, including with respect to tax.  

On the subject of expatriate customers, it is worth noting that during the past few years, Spain has appealed to Latin American high net worth individuals, who seek a secure environment for themselves and their families in a country with a culture similar to that of their country of origin. To this end, life assurance can also play a role in terms of wealth planning, insofar as it is an instrument that is not only fully recognised in Spain, but also in many Latin American countries (Mexico, Colombia, etc.).

 

To learn more about this subject, come and listen to our expert Gonzalo García Pérez, at the Farad Finance Forum, on 19 March 2019, at 3pm.

 

Conditions and procedure

Your business as an insurance intermediary is growing and you are considering selling OneLife’s insurance products outside your home market? To meet the needs of your increasingly mobile customers, you intend expanding into foreign markets? What are the opportunities open to you?

The situation as you understand it:

The business of insurance distribution (formerly insurance mediation) is highly regulated. Any insurance broker or agent must be authorised by the regulatory and supervisory authority before carrying on its activities. Once an insurance broker is authorised, it possesses a European passport (since the third life assurance directive of 10 November 1992), enabling it to conduct business in another European Union member state without being established in that state by way of the freedom to provide services. This means that the broker does not have to have a permanent establishment to provide services to customers outside the member state in which it is established.

It is this freedom to provide services that enables OneLife to offer its Luxembourg life assurance products in the European Union.

However, like insurance intermediaries, OneLife must first respect certain conditions before being able to pursue business in another Member Sate of the European Economic Area (EEA).

 

What you might not have known:

The two freedoms that allow insurance products to be distributed abroad are the freedom of establishment and the freedom to provide services, each of which has its advantages and drawbacks. Here is a brief presentation of these two freedoms.

1. Freedom to provide services

If you are registered with the FSMA (Financial Services and Markets Authority) in Belgium, the Luxembourg insurance commissioner (Commissariat aux Assurances – CAA) or the French register of insurance intermediaries (Organisme pour le Registre des Intermédiaires en assurance – ORIAS), then you possess the European passport. In order to sell insurance products in a market (Member State) other than the market in which you are established, you can choose to pursue your business in this other market by way of the freedom to provide services.

For example, for a French intermediary, articles L 515-1 et seq. of the French Insurance Code governs the procedure to follow in order to apply for an authorisation extension with respect to a foreign market:

  1. Any (re)insurance intermediary or any insurance intermediary distributing insurance as an ancillary activity registered in France that intends pursuing business for the first time in another Member State under the freedom to provide services must first send the following information to the body that maintains the register mentioned in I of article L. 512-1 (ORIAS):

    1° Its name, address and registration number;

    2° The Member State(s) in which it intends pursuing its business;

    3° The category of intermediaries in respect of which it intends to pursue its business and, where applicable, the name of any (re)insurance company it represents;

    4° The branches of insurance concerned, if any.

    II – Within one month of receiving this information, the body that maintains the register mentioned in 1 of article L. 512-1 communicates the information mentioned in I to the host Member State’s supervisor. The aforementioned body then informs the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity that the host Member State’s supervisor has received this information and that it can begin to carry on its activity in that State. Where applicable, at the same time, the body informs the intermediary that the information concerning the rules protecting the general good applying to the activity intended to be conducted in the host Member State are published by this State, and that the intermediary must respect these rules in order to pursue its business there.

The Luxembourg law on the insurance sector in its articles 293 and 293-1, and article 269 of the Belgian law of 4 April 2014 on insurance prescribes the same conditions:

Extract from Article 269 of the law of 4 April 2014:

  1. Any (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity registered in Belgium that intends pursing its business in Belgium for the first time in another Member State by virtue of the freedom to provide services must first inform the FSMA in the form and conditions the FSMA has prescribed.

Within one month of receiving the information referred to in paragraph 1, the FSMA communicates the information to the host Member State’s supervisor.
After the host Member State has confirmed receipt of the information, the FSMA informs in writing the intermediary concerned that it has received the information and that the intermediary may begin conducting its activities.

When pursuing its business in the host Member State, the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity referred to in paragraph 1 must comply with the laws and regulations of this host Member State applying to (re)insurance intermediaries or insurance intermediaries distributing insurance as an ancillary activity in the interests of the general good. The FSMA informs the intermediary concerned where it can find the relevant host Member State’s rules of general good.
The register specifies in which Member States the intermediary may operate by virtue of the freedom to provide services.

2. Freedom of establishment

The freedom of establishment is the right for any authorised person to set up undertakings in another EU Member State. That is to say, an authorised intermediary may establish a permanent presence by setting up a branch or office (permanent establishment) in another Member State subject to respecting the particular procedure as prescribed by article L 515-3 of the French Insurance Code, article 291 of the Luxembourg law on the insurance sector and article 270 of the Belgian law on insurance.

However, this does not concern the creation of a subsidiary (a company) in another Member State, which must obtain specific authorisation from the host State’s supervisor in order to pursue its business of insurance distribution.

The prescribed procedure is similar in the 3 countries.

Extract from article L 515-3 of the French Insurance Code:

  1. Any (re)insurance intermediary or any insurance intermediary distributing insurance as an ancillary activity registered in France that intends establishing a branch or permanent presence in another Member State under the freedom of establishment must first inform the body that maintains the register mentioned in I of article L. 512-1 and send the following information to that body:

    1° Its name, address and registration number;

    2° The Member State in which it intends establishing a branch or permanent presence in another legal form;

    3° The category of intermediaries in respect of which it intends to pursue its business and, where applicable, the name of any (re)insurance company it represents;

    4° The branches of insurance concerned, if any;

    5° The address, in the host Member State, for any correspondence concerning the communication of documents;

    6° The name of any person responsible for managing the branch or permanent presence.

    II – Unless the body that maintains the register mentioned in I of article L. 512-1 has reasons to doubt the appropriateness of the organisation structure or financial position of the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity compared with the intended distribution activities, it sends, within one month of receiving it, the information mentioned in I to the host Member State’s supervisor, which confirms receipt thereof. The aforementioned body then informs the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity that the host Member State’s supervisor has received this information.

    Within one month of receiving this information, the body that maintains the register mentioned in 1 of article L. 512-1 receives, from the host Member State’s supervisor, communication of the rules of general good applying in this State. The aforementioned body then informs the intermediary that it can commence to carry on its activity in the host Member State, provided it complies with these rules. If the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity has not received this information by the aforementioned deadline, it may establish the branch and begin conducting its activities.

    III – Should the body that maintains the register mentioned in article L. 512-1 refuse to send the information mentioned in I to the host Member State’s supervisor, it communicates to the (re)insurance intermediary or insurance intermediary distributing insurance as an ancillary activity, within one month of receiving all the information mentioned in I, the reasons for its refusal.

3. For each freedom, the procedure to follow before conducting any activity in another Member State

The intermediary must:

Then, the supervisory authority:

To sum up:

For the two freedoms, the procedures are clearly similar. However, whereas distributing insurance on a freedom of services basis is less complicated and less expensive than a permanent establishment in another Member State, which requires having a fixed business facility and resident staff, it can be an opportunity to offer services that are closer and more tailored to customers.

Whichever freedom is chosen by way of which the distribution of insurance is to be conducted, the activity cannot begin straight away and the intermediaries are advised to:

  1. inform OneLife as soon as possible in order to ask them relevant questions;
  2. anticipate their activity abroad in order to shorten the time spent on the regulatory administrative procedures and to respond to customers’ requests in good time.

You are an insurance intermediary and wish to grow your business abroad? OneLife’s experts are here to help you achieve this goal!

 

Author:  

 Jean-Nicolas GRANDHAYE – Corporate Counsel at OneLife

 

International Inheritance Planning

As previously explained, in the first part of this article, although the European Regulation of 4 July 2012[1] allows harmonisation of successions between France and Belgium at civil level, it does not deal in any way with the tax aspects and does not resolve the problems of double taxation that can result from these cross-border situations.

The criteria for exercise of fiscal jurisdiction in the two countries, and particularly the extensive powers of France in relation to inheritance tax where heirs/beneficiaries are resident in France therefore require careful attention in any inheritance planning. We will first briefly examine the legal instruments allowing possible solutions in this context.

1. The signature by France and Belgium of a Convention preventing double taxation of successions

On 25 January 1959, France and Belgium signed a convention for the avoidance of double taxation in matters of succession (hereafter, the Convention). When a person at the time of his/her death, is domiciled in one of the two States and his/her heirs are domiciled in the other State, it allows to determine which of the two States concerned will be granted the right to apply inheritance tax.

This Convention provides, as a general principle, that property belonging to the deceased is liable to taxation only in the state where the deceased was domiciled at the time of his/her death[2]. This principle is applicable in particular to life insurance policies which fall within the scope of Article 757 B of the French General Tax Code.

It is important to note that the concept of domicile in the Convention should be understood as the place where the deceased had his/her “permanent home”[3], in other words the centre of his/her vital interests.

This is an important mechanism in respect of the amount of tax which may be due in the two States, particularly in the case of a life insurance policy taken out by a person resident in Belgium for tax purposes with a beneficiary who is resident in France. As families are now highly mobile, extensive knowledge of these principles is essential.

2. Impacts and points to watch linked to the specifics of the tax system of each country

While the Convention allows the allocation of the right to tax inheritance, vigilance is required, as the taxes it covers are specifically listed[4].  In the case of premiums paid before the insured person is 70 years old, the fixed taxes of 20% and 31.25%[5] are not taxes on inheritance but sui generis tax not covered by the Convention. This sui generis tax could therefore be added to the death duties payable in Belgium under domestic law. However, for premiums paid after the insured person is 70 years old, payments under the life insurance policy fall within the scope of the inheritance taxes covered by the Convention (up to the limit of the premiums paid)[6].

It may also be worth noting that transfers inter vivos are expressly excluded from the scope of the Convention. Therefore, only the domestic law of each State applies to gifts inter vivos. Moreover, the gift of a policy (as often used by Belgian residents) by a Belgian resident to a French resident should be subject to gift taxation in France and could also lead to a novation of the policy from a French tax perspective.

Nevertheless, in the light of careful examination, and by means of tailored structuring, a Luxembourg life insurance policy may in certain situations enable limitation of the tax impact of inheritance in a Franco-Belgian context.

We offer the following case study as an illustration of this idea, and to highlight a number of pitfalls to be avoided in Franco-Belgian planning using life insurance.

  • Case study: tax treatment of a life insurance policy taken out in a Franco-Belgian context.

Mr and Mrs Leduc were Belgians living in Lille, while their children, Louise and Victor, lived in Bordeaux and Brussels respectively. Mr and Mrs Leduc wished to spend their retirement in Knokke in Belgium. Taking account of their family’s international situation and with a view to preparing for the transfer of their property to their children, they jointly subscribed to a Luxembourg life insurance policy in the year of their 72nd birthday, with a value of €2.5 million. Mr and Mrs Leduc’s marriage was subject to a community of property regime, the premiums were paid from their joint property and in addition their lives were insured under the policy. Louise and Victor were named as the beneficiaries of the policy.

Ten years later, Mr Leduc died. At that time, he was resident in Belgium. As the general terms and conditions of the OneLife life insurance policy included an accretion clause providing for increase by default, Mrs Leduc recovered the rights to the life insurance policy. She always received excellent advice, and as a result of the structuring of the life insurance policy (taking account in particular of reforms of succession and matrimonial tax regimes in Belgium) Mrs Leduc was not liable to inheritance tax on the part of the policy which she recovered following the increase in its value to her benefit.  As Mr and Mrs Leduc were resident in Belgium for tax purposes, we are in a purely Belgian situation here.

Sadly, a few years later, Mrs Leduc died. Her children, residing in Belgium and France respectively, each received half of the value of the policy, €3.1 million. 

So, what taxation is applicable to the amounts received by the children? 

We will consider the cases of Victor, a Belgian resident, and Louise, a French resident, separately.

  • Victor’s case

Victor, a Belgian resident for tax purposes, was therefore entitled to receive half of a life insurance payment under a“stipulation pour autrui” (provision in the contract conferring a benefit to a third party). He was very fortunate in that OneLife had paid careful attention to his parents’ case and their wish for tax optimisation. He was in a position to make excellent use of his share in the capital from the life insurance policy (50% of 3.1 million EUR), which came to him free of any inheritance tax. To achieve this, his mother had inserted a transfer of rights known as “post-mortem” into the policy, so enabling Victor to be classified on the death of his mother, as the “policyholder”. As the policy was wound up on the death of his mother, the tax for which Victor was liable on the capital he received was taxation of a gift, rather than inheritance tax. This part of the planning was a resounding success, as Mrs Leduc retained control of the asset until her death, while her son had to pay tax not of 27% (tax on inheritance by direct family members) but 3% (tax on gifts to direct family members). 

  • Louise’s case

As in Victor’s case, as Louise’s parents were residents in Belgium for tax purposes at the time of their deaths, she would be liable to pay inheritance tax in Belgium. Without the benefit of any tax treaty, as a beneficiary resident in France[7] for over six of the last ten years, Louise would also have been liable to pay French inheritance tax[8] with a marginal rate of 45%[9] on the premium paid (i.e. €2.5 million), thus creating a situation of double taxation.

However, thanks to the Convention agreed between France and Belgium, only Belgium had the right to tax the inheritance resulting from the policy. 

Louise was nevertheless liable to pay social security contributions at a rate of 17.2% on sums which were not subject to such contributions while her parents were alive.

From the Belgian perspective, Louise was also named as a beneficiary of the post mortem transfer of rights for 50% of the value of the policy. She therefore also received, on her mother’s death, a capital sum under “stipulation pour soi-même” (personal stipulation)(as she qualified both as policyholder and beneficiary of the policy at the time of her mother’s death). Therefore only taxation on gifts, amounting to 3% in Belgium for direct family members, was due.

As the transfer of rights post mortem is not officially recognised in France, it is appropriate to analyse the legal and tax consequences of such operation.

Points of attention: If the policy had been taken out before the person whose life was insured was 70 years old, the tax payable by Louise in France[10] would not be covered by the Convention which would therefore not have been applicable.

As this is just one of many examples of structuring, it is reasonable to conclude that Luxembourg life insurance, with its combined civil and tax advantages, can allow optimal inheritance transfer arrangements in a cross-border context.

Please note that the above developments are merely an overview of some of the implications of cross-border inheritance planning and that the practical impact of these measures should be assessed on a case-by-case basis.

OneLife’s experts are at your disposal for any questions you may have.

If you are interested in these case studies, download our e-book  #Success in #Succession Part I and Part II

 

Authors:

  Fanny PERPERE – Wealth Planner

  Nicolas MILOS – Senior Wealth Planner

 

 

[1] REGULATION (EU) No. 650/2012 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 4 July 2012

[2] Art. 8 of the Convention.

[3] Art. 3 of the Convention.

[4] Art. 1 of the Convention.

[5] Art. 990 I of the General Tax Code (Code Général des Impôts – “CGI”).

[6] Art. 757 B of the CGI.

[7] Art. 4 B of the CGI.

[8] Art. 750 ter and 757 B of the CGI

[9] Above 1,805,677 EUR

[10] Art. 990 I of the CGI – sui generis tax not assimilated to French inheritance taxes.