Taxation of life assurance premiums

Group or collective?

Polish law distinguishes between a group policy and a collective policy. The main difference is that a group policy lists named beneficiaries, who are covered under the policy, while a collective policy covers a named class of beneficiaries (for example, certain members of the staff). There is a difference in the personal income tax and social security treatment of these two types of policy.

The Corporate Income Tax Law of February 15, 1992 (Art. 16, point 59) excludes insurance payments made by employers as a tax-deductible cost of earning income unless the policies meet certain conditions.

What qualifies?

Only policies which are insurance contracts covering risk groups 1, 3, and 5 of Section I and groups 1 and 2 of Section II, set out in the appendix to the Law on Insurance Activities of May 22, 2003 can qualify as tax deductible. These policies must be concluded with an insurer operating in Poland or within the EU.

Section I refers to life assurance, life assurance linked to investment funds, and accident and sickness insurance, if these are additional to the first two types of insurance. Section II refers to accident insurance including accidents in the workplace and industrial diseases, as well as sickness insurance.

Provided that the insurance product falls into the above groups, it needs to meet two further conditions:

1. The employer cannot financially benefit from the insurance, and

2. The insurance policy excludes for a period of five years, counting from the end of the calendar year in which it was concluded or renewed:

a) the payment of an amount for surrendering the policy

b) the possibility of entering into liabilities under guarantee of rights arising from the policy

c) payment of an amount when a specific age has been reached

Since the Law makes no distinction between collective and group policies for the purposes of tax deductibility in practice, there should be no difficulty obtaining a deduction for premia paid in respect of a qualifying policy of either type, but some tax officials have recently questioned whether a deduction is permissible in respect of premia paid in respect of a qualifying collective policy. In my view, this approach is without substance.

Benefits-in-kind

The Personal Income Tax Law of July 26, 1991 (Art. 12) defines income from employment very broadly so as to catch nearly all possible benefits-in-kind.

The legislation then goes on to state that the value of a benefit-in-kind may be fixed in a number of ways, but relevant in the case of insurance products is Article 11 Paragraph 2, which states that if a benefit-in-kind comprises services purchased by an employer, the taxable value of the benefit is equal to the purchase price paid by the employer.

Therefore a benefit-in-kind can be assessed on employees in respect of the provision of coverage under a group insurance policy. This will also be assessable to employee and employer social security (ZUS) contributions as part of base remuneration. 

However, the current practice of the tax authorities is not to assess a taxable benefit in the situation where coverage is provided under a collective insurance policy and there is no contractual right to the coverage. The reasoning is that since the employee is not named or contractually entitled to coverage, a benefit cannot be directly linked between the employee's employment and the provision of the insurance coverage. Since the rules for determining whether ZUS contributions are due follow the tax rules, there are no employee or employer ZUS contributions either.

Exemptions

When benefits are paid out under an insurance policy, the Law states that amounts received under "property and personal insurance" are exempt from taxation. However, this only applies to policies held with domestic and EU insurers.

Amounts received from a non-domestic or non-EU insurer do not benefit from this exemption and are subject to PIT under Article 20 of the PIT Act at the standard progressive rates. This income is declared on the annual tax return and any tax due is paid on or before April 30 of the following year.

The profit element derived from any insurance product linked to investment funds is, however, taxable under Article 24, paragraph 15 of the Law.  This is taxed at a flat rate tax of 19 percent in accordance with Article 30a. Domestic insurers will deduct this at source, otherwise this income is declared on the annual tax return and any tax due is paid on or before April 30 of the following year.

Richard Wernick

Richard Wernick is managing director of Totalserve (Polska) Sp. z o.o. He is a chartered tax advisor and registered trust and estate practitioner and has been practicing in Poland since 1997