Life insurance contract with an investment risk
Upon taxation of income received under a life insurance contract with an investment risk (hereinafter insurance contract) the date of entry into the contract is relevant. In the case of a life insurance contract with an investment risk (IREK) concluded before 1 August 2010, the amount to be received after 12 years of the conclusion of an insurance contract is exempt of tax.
If the disbursement is received within 12 years as of the entry into the insurance contract, the amount received minus insurance premiums paid under the same contract shall be subject to taxation. Tax liability arising from income derived from the life insurance contract concluded before August 2010 may not be deferred. An amount received under the insurance contract (taxable or exempt from tax) may be transferred to an investment account as a contribution for further reinvestments. Disbursements from an investment account in the amount of the contribution are not subject to taxation.
In case of a life insurance contract with an investment risk concluded as of 1 August 2010 there are two options for taxation of income. If the underlying assets of an insurance contract meet the requirements specified in § 171 (2) of the Income Tax Act, a taxpayer may opt for an investment account system. If a policyholder has notified an insurer beforehand that an insurance indemnity is received from the financial assets acquired for money in the investment account specified in § 172 of the Income Tax Act, the insurer shall be exempt from an obligation to withhold income tax. Upon receipt of a disbursement under an insurance contract it must be transferred to an investment account immediately. A person, who has declared the accumulated reserve of the insurance contract in the value available as at 31 December 2010 or notified the insurer of the investment account, must keep in mind that if he or she fails to transfer the received amount to the investment account immediately, it shall be regarded as a disbursement from the investment account.
An alternative is not to involve the insurance contract concluded as of 1 August 2010 in the investment account system. In such case the received amount minus insurance premiums paid under the same contract shall be subject to taxation. The investment account system is not practical if, for example, the recipient of a disbursement is a beneficiary or another person – other than an insurer, for both persons must declare the amount received as income.