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Practical Guide to Income Tax 2019.

General scheme

When deferred, life-long or temporary income is received, which has not been acquired by inheritance, legacy or any other title of succession, in the terms discussed in number 1 above, the return on movable capital will be the result of applying to each annuity the corresponding percentage of those provided for immediate, life-long or temporary income.

This result will be increased by the profitability obtained until the creation of the income, the determination of which will be given by the difference between the current actuarial financial value of the income that is created and the amount of the premiums paid. This profitability will be distributed linearly during the first 10 years of collection of said income if it is for life or between the years of duration of the same, with a maximum of 10 years, if the income is temporary (Art. 18 Regulation PIT). The following formula can be used to determine it:

(VA - PS) ÷ No. of years

Being:

  • "VA" is the actuarial present financial value of the income being established.
  • "PS" the amount of premiums paid.
  • "Nº years" is the number of years that the temporary income will last, with a maximum of 10 years. If the annuity is for life, 10 years will be taken as a divisor.

When the income has been acquired by donation or any other legal transaction free of charge and inter vivos , the return on movable capital will be, exclusively, the result of applying to each annuity the percentage that corresponds to those provided for immediate life or temporary income, since the creation of the income was taxed in the Inheritance and Gift Tax.

The portion of income that is considered income from movable capital, by applying the corresponding percentage, will be subject to withholding tax.

Remember: Life or disability insurance policies that provide benefits in the form of capital and said capital is intended to create life annuities or temporary annuities, provided that this possibility of conversion is included in the insurance contract, will be taxed at the time of creation of the annuities in accordance with the provisions of this section. In no case will this tax regime apply when the capital is made available to the taxpayer by any means.

Example:

Mr. GAM signed a deferred annuity life insurance policy on January 3, 2010, paying an annual premium of 6,000 euros payable on January 5 of each of the years 2010 to 2019, both inclusive.

On October 23, 2019, coinciding with his 68th birthday, he began receiving a life annuity of 10,000 euros per year.

Determine the net return on movable capital knowing that, according to the certification of the insurance company's actuary, the current actuarial financial value of the life annuity to be collected amounts to 70,000 euros.

Solution:

The net return on movable capital will be given by the sum of:

Percentage applicable to the annuity: 20 for 100 s/10,000: 2,000

Profitability until the creation of income: (70,000 – 60,000) ÷ 10 (*): 1,000

Return on capital assets: 2,000 + 1,000: 3,000

Note to example:

(*) The return obtained until the income is established, the difference between the current actuarial financial value of the income being established (70,000 euros) and the amount of the premiums paid (6,000 x 10 = 60,000), is distributed linearly over the first ten years of collection of the income, so that from the eleventh year onwards the return on movable capital will consist exclusively of 2,000 euros, since the applicable percentage based on the age of the annuitant at the time of the income being established (68 years) remains constant throughout the term of the income. (Back)