Example: application of the transitional regime for the reduction of life insurance contracts concluded before December 31, 1994
Mr. BCA received on October 10, 2023, coinciding with the date of his retirement, a benefit in the form of a capital amount of 80 ,000 euros, derived from a retirement plan corresponding to an individual life insurance policy taken out with the insurance company "Z".
The total amount of premiums paid to the insurance company amounted to 75,004.02 euros, at the rate of an annual premium of 1,500 euros, increasing by 3% annually and paid on 1 March of each of the years between 1993 and 2023, both inclusive.
Determine the reduced net return on capital assets derived from the aforementioned individual life insurance.
Solution:
1. Determination of gross and net income.
In accordance with the provisions of article 25.3 a) of the Personal Income Tax Law , the difference between the benefit received and the premiums paid is considered to be income from movable capital: 80,000 – 75,004.02 = 4,995.98
2. Application of the transitional reduction regime.
In accordance with the transitional regime for life insurance contracts generating increases or decreases in assets prior to January 1, 1999, contained in the fourth transitional provision of the Personal Income Tax Law, when deferred capital is received, the portion of the net income corresponding to premiums paid prior to December 31, 1994, which was generated prior to January 20, 2006, will be reduced as follows:
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Portion of the total net income that corresponds to each of the premiums paid before 31-12-1994.
Pay day Amount of premiums Time to collection (years) Time until collection (days) Weighting coefficient (*) Performance per premium (**) Notes to the table:
(*) The determination of the weighting coefficient is the result, rounded to the seventh decimal, of the following fraction:
(Premium x number of years elapsed until collection) ÷ ∑ (each premium x number of years elapsed until collection)
In the example, for the premium paid on 01-03-1993, this fraction is as follows: (1,500 x 30.61) ÷ 995,886.36 = 0.0462081
For the premium paid on 01-03-1994, said fraction is the following: (1,545 x 29.61) ÷ 995,886.36= 0.0460391 (Back)
(**) Once the weighting coefficient for each premium has been applied to the total insurance yield (4,995.98), the yield corresponding to each of the premiums is obtained, the result of which is shown in the corresponding column.
For the premium paid on 01-03-1993, the corresponding yield will be equal to: 4,995.98 x 0.0462081 = 230.85
For the premium paid on 01-03-1994, the yield will be equal to: 4,995.98 x 0.0460391 = 230.01 (Back)
01-03-93 1,500.00 30.61 11.180 0.0462081 230.85 01-03-94 1,545.00 29.61 10.815 0.0460391 230.01 -
Portion of the total net income corresponding to each of the premiums paid prior to 31-12-1994 generated prior to 20-01-2006.
Notes to the table:
(*) To determine the portion of the benefit that, corresponding to each of the premiums paid prior to December 31, 1994, was generated before January 20, 2006, the yield per premium will be multiplied by the weighting coefficient resulting from the following quotient:
In the numerator, days elapsed between the payment of the premium and January 20, 2006.
In the denominator, days elapsed between the payment of the premium and the date of collection of the benefit.
In our example, for the premium paid on 01-03-1993, this fraction is as follows: 4,708 ÷ 11,180 = 0.4211091
For the premium paid on 01-03-1994, this fraction would be 4,343 ÷ 10,815 = 0.4015719 (Back)
(**) The reducible yield, that is, the yield generated up to 20-01-2006, is determined by the result of multiplying the yield per premium by the weighting coefficient determined in accordance with the provisions of note (1) above. (Back)
Performance per premium Years up to 31/12/1994 Days until 20/01/2006 Weighting coefficient (*) Performance until 20/01/2006 (**) 230.85 2 4.708 0.4211091 97.21 230.01 1 4.343 0.4015719 92.37 -
Performance susceptible to reduction and applicable reduction.
Performance until 20-01-2006 (*) Percentage reduction (**) Reduction amount Notes to the table:
(*) Joint maximum limit: The maximum amount of capital received will be 400,000 euros, a limit that will be applied jointly to all amounts of deferred capital obtained from 1 January 2015 until the time of temporary imputation of the capital (including the amount to whose yield the reduction coefficients of the transitional regime are intended to be applied).
In the present case, the amount of 80,000 euros corresponding to the benefit received on October 10, 2023 (the only deferred capital, obtained by the taxpayer from January 1, 2015 until the time of the temporary imputation of the deferred capital, to which the transitional regime would have been applicable) is less than 400,000 euros, so the abatement coefficients will be applied to all the reducible income generated until January 20, 2006. (Back)
(**) The reduction percentage is the result of multiplying 14.28 by 100 for each year, rounded up, between the payment of the premium and December 31, 1994. (Back)
97.21 28.56 % 27.77 92.37 14.28 % 13,19 Total applicable reduction - 40.96
3. Determination of the net income to be included in the savings tax base.
The net income to be included in the taxable savings base is the difference between the total net income and the reduction resulting from the application of the transitional regime: (4,995.98 - 40.95) = 4,955.03 euros