Amendments to taxation as of 1 January 2020

Finnish Parliament accepted, on 13 March 2019, legislative amendments as a result of which the taxation of endowment insurance policies and capital redemption contracts will change as of 1 January 2020.

The amendment will influence partial surrenders of savings. As of 1 January 2020, the relative proportion of the savings to be withdrawn that at the time of payment corresponds to the proportion of returns out of the insurance savings is considered taxable capital income. The part of the insurance savings that exceeds the amount of insurance premiums is still considered return from the endowment insurance.


Correspondingly, the above also concerns capital redemption contracts taken out by a company, in which the return is considered taxable income under the Act on the Taxation of Business Income.

Examples:

Partial withdrawal of insurance savings before 1 January 2020

  • The policyholder can withdraw insurance savings from the insurance without taxation being realised if the savings withdrawn are capital. If the savings withdrawn are return, the withdrawal is taxed as capital income.
    • Example: Insurance savings amount to EUR 10,000, of which EUR 5,000 is capital and EUR 5,000 return. If EUR 1,000 is withdrawn from the insurance, it is considered solely capital, and no tax is levied on the withdrawal.
    • Example: Insurance savings amount to EUR 10,000, of which EUR 5,000 is capital and EUR 5,000 return. If EUR 6,000 is withdrawn from the insurance, EUR 5,000 of it is considered capital and EUR 1,000 return, which is taxed as capital income.

Partial withdrawal of savings after 1 January 2020

  • Both capital and return are always withdrawn in partial withdrawal. Return is taxed as capital income.
    • Example: Insurance savings amount to EUR 10,000, of which EUR 5,000 is capital and EUR 5,000 return. If EUR 1,000 is withdrawn from the insurance, EUR 500 of it is considered capital and EUR 500 return, which is taxed as capital income.
    • Example: Insurance savings amount to EUR 10,000, of which EUR 5,000 is capital and EUR 5,000 return. If EUR 6,000 is withdrawn from the insurance, EUR 3,000 of it is considered capital and EUR 3,000 return, which is taxed as capital income.  

Insurance showing deficit upon termination

The legislative amendment also affects the taxation of insurance showing deficit upon termination after 1 January 2020. If the insurance shows deficit upon termination, i.e. the savings withdrawn from the insurance during the entire insurance period is below the capital invested in the insurance, the loss can be deducted from other taxable capital income in the insurance termination year and during the following 10 years.

Examples:

Termination of insurance showing deficit before 1 January 2020

If the insurance shows deficit upon termination, i.e. the savings withdrawn from the insurance is below the capital invested in the insurance, the loss cannot be deducted from other taxable capital income.

Termination of insurance showing deficit after 1 January 2020

If the insurance shows deficit upon termination, the loss can be deducted from other taxable capital income during the year of termination and during the following 10 years.

Correspondingly, deficit shown by the capital redemption contract taken out by a company can be deducted from the income of the source to whose assets the contract belongs.