Tax deductibility of private life insurance

Czech Republic: As of 1 January 2015, stricter criteria apply when determining the tax deductibility of private life insurance

Until now, it was not uncommon for employers to pay a contribution to their employees’ life insurance instead of giving them a raise; the employees would then withdraw funds from their life insurance under cash-value policies, thus circumventing the obligation to pay tax and health and social insurance. An amendment to the Income Tax Act will close this loophole as of 1 January 2015, by tightening the conditions under which private life insurance premiums may be deducted from one’s assessment base. The amendment is intended to prevent the abuse of private life insurance products.

The new rules apply to all contracts on private life insurance that otherwise meet the requirements for tax deductibility, i.e., they also affect those taxpayers who receive no contributions from their employer.

Under the new rules, if a taxpayer wishes to deduct insurance premium payments (up to a total limit of no more than CZK 12,000 per year), they will have to adjust the existing contract to make it conform to the new statutory conditions set out in the amended Income Tax Act as of 1 January 2015. If they do so, the insurance contract will indeed be eligible for preferential tax treatment, and the employer will continue to be able to make contributions according to the same rules as previously.

However, if a cash-value policy were to be left untouched (i.e., if it still allows cash-value withdrawals), then it can no longer be used to reduce the tax assessment base, and any employer’s contributions to such a life insurance policy provided as a company benefit would no longer be tax-exempt.

Employees who wish to make use of this particular kind of tax relief will have to prove to the employer that their insurance policy conforms to the rules. Failure to do so means that the employer cannot account for contributions to the employee’s insurance (if any) as tax-free income.

If the conditions for tax deductibility that come into force on 1 January 2015 are being violated, then the taxpayer will have to:
– retroactively apply tax on all amounts which they claimed as a deductible in conflict with the law;
– retroactively apply tax on any employer’s contributions that were granted after 1 January 2015. The employee has no obligations with respect to employer’s contributions made until 31 December 2014, and such contributions do not come into play with respect to capital gains tax deductions.
– notify the employer of the violation.

The employer will then have to tax their life insurance contribution in the same way as they would tax wages or salaries, and withhold and transfer health and social insurance contributions from the relevant amounts.

Source: Income Tax Act (Act No. 586/1992 Coll., as amended by Act No. 267/2014 Coll.)

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