Many companies offer their employees the possibility of having life insurance. These are known as group corporate insurance policies. In this way, companies offer an incentive to attract and retain talent. Together with occupational welfare plans, mutual societies and pension plans, group insurance forms part of a system that complements Social Security protection.
When a worker is offered this insurance, in addition to reviewing the covers and policy details, one point must be considered: the tax treatment of corporate life insurance policies.
Tax Treatment of Corporate Life Insurance Policies
The first point to bear in mind is that the employer may deduct the premium payment provided it is considered payment in kind. For this to apply, it is essential that:
- the policy complements employees’ remuneration;
- the rights to the benefits, meaning all benefits included in the policy, are transferred from the policyholder, the employer, to the insured person, the employee;
- the company is obliged to pay them under an agreement, for example if they are included in the employment contract.
Benefits paid on death are taxed under inheritance and gift tax. This is important because it is the main difference compared with other benefits, such as pension plans or welfare plans, which are taxed under personal income tax.
The company should also bear in mind that, if the policy includes benefits linked to death, retirement or disability, it should not pay Social Security contributions on that part.
Finally, it is worth noting that although contributions are considered gross employment income paid in kind, they are not deductible from the employee’s personal income tax base. Two situations may therefore arise:
- If the company does not deduct the contribution, there will be no tax attribution to the employee.
- If the company does deduct the contribution, the employee will be taxed on it under personal income tax and the transfer of rights will apply.
Taxation of Corporate Life Policies
As explained above, if the premium is collected as a result of the employee’s death, it will be subject to inheritance and gift tax. However, all benefits that are not paid as a consequence of death are taxed under personal income tax as gross employment income. In this case, if the employee has already been taxed on the contributions, they will only be taxed on the difference with the capital received. If not, they will be taxed on the full amount of the benefits.
The tax treatment of corporate life insurance policies is a complex subject. The recommendation from Vida SR is to seek professional advice before accepting or signing, in order to understand what is most appropriate in each case.