There has been an option for taxpayers since 2001 to deduct the value of contributions made to their private life assurance from the tax base. The taxpayer may deduct the non-taxable portion of the tax base provided that the conditions, the exhaustive list of which is provided in the Income Tax Act, have been met.
If an early termination is applied with respect to an insurance contract, the entitlement to the non-taxable portion of the tax base shall cease to exist, and the amounts, by which the tax base was reduced in previous ten years as a result of the paid insurance premium, shall constitute other income of the taxpayer, which has to be taxed in the taxation period, in which the conditions were violated. However, this does not apply in cases of insurance contracts, under which insurance benefits or the repurchase value will not be paid and, at the same time, the reserve, capital value or repurchase value will be directly transferred to another private life assurance contract, which also meets the conditions pursuant to the Income Tax Act.
A situation may occur where the insurance company quantifies a zero repurchase value upon an early termination of an insurance contract, and the taxpayer is not paid any money by the insurance company, but no money is transferred to a newly formed contract either. As a consequence, the second condition specified by the Income Tax Act for the application of the exemption from the payment of additional tax on the exercised reductions, cannot be in fact complied with because the taxpayer is not entitled to any repurchase value.
The above-described matter has been commented on by the General Financial Directorate at their latest coordination committee meeting; they supported an opinion that if continuity in the form of an immediately following new contract is obvious, indicating the taxpayer’s clear intention to continue in maintaining the saving scheme, whilst the insurance company quantifies a zero repurchase value upon the taxpayer’s request to have the repurchase value transferred to another life assurance, and the insurance company relies on the general business terms and conditions applicable to that product and actuarial, it is sufficient to comply with the other terms and conditions, and there shall not be any obligation to pay additional tax on the deducted insurance premium in such case.