TAX
Jorge Santa Cruz
Context and Supreme Court Rulings
The Spanish Supreme Court issued two key rulings on October 14, 2024 (Rulings 1598/2024 and 1599/2024) in response to appeals filed by two taxpayers against assessments made by the Galician Tax Agency. These rulings addressed the treatment of unit-linked life insurance policies, where the policyholder assumes the investment risk, concluding that such policies should not be subject to the Wealth Tax (Impuesto sobre el Patrimonio, IP) when the policy does not grant the right of surrender during its term.
The Court’s decision specifically applies to tax periods prior to the reforms introduced by Law 11/2021 (effective July 9, 2021), which amended Article 17.1 of the Wealth Tax Law to establish a new valuation criterion for life insurance policies.
Background of the Case
The Galician Tax Agency argued that the value of a unit-linked policy should be included in the taxable base of the Wealth Tax, based either on its surrender value or, in its absence, the equivalent mathematical provision value. Taxpayers contested this interpretation, but both the Regional Economic-Administrative Tribunal of Galicia (TEAR) and the Galician High Court of Justice (TSJ) partially upheld the assessments, rejecting the taxpayers’ claims that such policies should not be included in the Wealth Tax base.
Supreme Court’s Position
The Supreme Court ultimately ruled in favor of the taxpayers, clarifying that unit-linked contracts without a recognized surrender right should not be included in the Wealth Tax base under the original wording of the law. Specifically:
Original Legislative Intent:
The Court found no basis in the pre-2021 legislation to support the Galician Tax Agency’s argument that the mathematical provision value could serve as a substitute for the surrender value.
Nature of Unit-Linked Policies:
While unit-linked life insurance policies combine life coverage (death or survival contingencies) with an investment component, their treatment under tax law should consider their true economic nature.
The Court cited European Union jurisprudence to reaffirm their classification as life insurance products, distinguishing them from other financial investment instruments.
Changes Introduced by Law 11/2021:
The 2021 reform explicitly introduced a rule requiring the inclusion of the mathematical provision value for life insurance policies without a surrender right in the Wealth Tax base.
However, the Court emphasized that this rule does not have retroactive effect and therefore cannot apply to tax periods preceding its implementation.
Implications of the Ruling
The Supreme Court’s decisions clarify a longstanding controversy, affirming that:
No Taxation Prior to 2021 Reform:
Unit-linked policies without a surrender value are excluded from the Wealth Tax base for periods prior to July 9, 2021.
Post-Reform Treatment:
For tax periods following the enactment of Law 11/2021, such policies must be valued based on their mathematical provision if no surrender right exists.
Economic Substance over Form:
The rulings underscore the importance of interpreting tax laws in accordance with the economic substance of the contracts rather than their formal characteristics, promoting fairness in tax assessments.
Conclusion
These rulings represent a pivotal step in aligning the treatment of unit-linked life insurance policies with their legislative and economic context. They provide clarity to taxpayers and tax authorities, particularly in distinguishing pre-2021 cases from those governed by the new rules.
