Unit-linked life insurance provides a long-term savings and investment solution in Finland, offering clients and their beneficiaries unique benefits and flexibility.
Clients benefit from gross roll-up, allowing them to invest in a diverse range of assets and make changes to their investments freely and tax-free. Accumulated gains are only taxed when funds are withdrawn from the policy and are subject to capital gains tax in Finland. Furthermore, losses on a full surrender may be deducted from their capital gains tax liability in the tax year or carried forward for up to 10 years.
Policies from an Irish insurer also benefit from VAT exemption on asset management fees. Furthermore, life insurance simplifies inheritance planning by allowing policyholders to directly transfer assets to their chosen beneficiaries. Unlike a will, where assets become part of the estate, life insurance ensures that beneficiaries receive the assets directly upon death, enabling quick access to death benefits.
Portability
Given the growing mobile and international population, families often relocate across several jurisdictions during their lifetimes. Consequently, long-term wealth solutions must be portable to meet client expectations.
Unit-linked life insurance products, such as those offered by Utmost Wealth Solutions, are designed to facilitate this portability. When a policyholder changes their country of residence, these products allow tax benefits to be maintained without having to surrender or restructure the policy.
Finland has signed tax treaties with around 70 countries, primarily based on the OECD’s model tax treaty.
Moving from Finland
When a citizen of Finland moves abroad, the “three-year rule” in the Income Tax Act usually applies. They are typically regarded as a resident taxpayer in Finland for the year they move away and the following three years. They may be considered a non-resident taxpayer before the end of the third year if they claim non-resident status and demonstrate no substantial ties with Finland during the tax year. A permanent move is key to breaking substantial ties.
It is essential to assess clients’ personal circumstances thoroughly before moving jurisdictions to avoid unfavourable tax and regulatory consequences. Clients should ensure their policy features, such as biometric risk, investment model, asset permissibility, and beneficiary nomination, are compliant in the destination country.
In 2022, the Finnish government proposed an exit tax that would have subjected individuals with significant non-real estate assets, including life insurance policies, to capital gains tax on the increased value of their assets when leaving Finland. This proposal was removed from the legislative plan, with no indication it will be reintroduced in the near future.
Previously, Finland and Portugal had a double tax treaty in force affecting pension taxation. The Portuguese Non-Habitual Tax Resident Regime, which was in force until 31 December 2023, featured a reduced flat tax rate of 10% for non-Portuguese sourced pensions. Following its expiry on 31 December 2018, persons living in Portugal who receive a pension from Finland pay tax in Finland and may need to apply for a tax credit in Portugal for the Finnish tax.
Moving to Finland
When clients move to Finland and wish to keep their foreign life insurance compliant, they should ensure policy features like biometric risk and beneficiary nomination align with Finnish requirements. Key points to consider include:
Taxable Gain: Under the Finnish Income Tax Act 1535/1992, only the gain from a life insurance policy is taxable if:
- The proceeds are paid as a lump sum or in several instalments over less than two years. This means that long-term regular withdrawals are not a feasible option in Finland.
- The proceeds are payable to the policyholder while also being the life assured, or to the policyholder’s spouse, heir in the direct ascending or descending line, adopted child, their direct heir, foster child, or child of the policyholder’s spouse.
- The premiums have not benefited from tax relief.
Special Tax Treatment of Certain Insurances: Section 35b of the Income Tax Act states that the gross roll-up benefit of life insurance policies can be lost if the policyholder or an appointed person has rights over the underlying assets. These include:
- Control or voting rights.
- Deciding transfer terms or disposal.
- Determining use or possession.
- Submitting trade instructions or enter into other contracts on behalf of the insurance company with third parties.
The condition is deemed to be fulfilled if the policyholder or an appointed person has exercised any of these rights during the tax year, if the agreement provides for the exercise of such rights, or if the actual possibility of exercising such rights exists.
Therefore, to avoid misinterpretation, policy documents and features must ensure:
- In-specie surrenders are prohibited.
- The insurance company appoints third parties (mainly discretionary asset managers and investment advisers).
- The insurance company has absolute discretion for investment decisions.
- All trade instructions are routed via the insurance company.
Summary
Unit-linked life insurance offers significant benefits and flexibility for clients in Finland, providing long-term savings and investment solutions.
Contact your Utmost sales representative to discuss how our tailored life insurance solutions can help you maximise these benefits and navigate the complexities of tax and regulatory requirements seamlessly.