Court Decision on Life Insurance Contracts: Reinvestment and Income “at the disposal”

The Portuguese Central Administrative Court (South), acting as an Appellate Court, annulled a personal income tax assessment concerning transfers between different life insurance products within the same insurance company (Link to the case - in Portuguese).

The Portuguese Tax Authority had argued that when a policyholder authorizes the insurer to terminate one investment before maturity and reinvest the capital and accrued income in another life insurance product, this amounts to a “total redemption”, thereby triggering taxation on the accrued income.

The First Instance Court had accepted the reasoning form the Tax Authorities. The Appellate Court was therefore called to decide whether the mere transfer (before maturity) of capital and accrued income to another product could be treated as placing income “at the disposal” of the policyholder, triggering taxation.

The answer was clear: NO. The tax assessments were illegal, and the First Instance Court decision was overturned.

The Court emphasized two distinct legal relations:

• The life insurance contract (risk of life) between the insurance company and the policyholder.

• The financial investment made by the insurance company with the policyholder’s capital.

The underlying investment does not equate to redemption of the life insurance contract. For income to be considered “made available,” the policyholder must in fact have the ability to freely receive or withdraw the funds. Mere authorization to redirect capital into another product does not confer such power. Without actual payment, there is no taxable event. Thus, only redemption, advance, or maturity can trigger taxation in life insurance contracts. Pure reinvestment within the insurance wrapper does not.

Kore Take

1.      Positive: The Appellate Court applied a strict legal interpretation of “made available” or “placing at disposal,” safeguarding the principle of ability to pay.

2.      Negative: The case highlights the tendency of the Portuguese Tax Authorities to “manufacture” taxable events where none should exist and the need to clarify vague terms.

3.      Policy: The decision underscores how the Portuguese tax code fails to promote clearly fair reinvestment choices by savers. Comparative lessons exist and could be welcome, such as:

a.      Allow deferral when investors switch between UCITS compartments or reinvest directly into another UCITS without cash withdrawal;

b.      Allow clearly neutrality for mandatory fund conversions or restructurings, provided the investor receives equivalent units and no cash;

c.      Extend deferral to provider transfers within qualifying long-term pension and life insurance contracts; and

d.      Allow neutral rollovers where the capital + interest is fully reinvested into a similar structured products without cash withdrawal.

If Portugal wants to increase savings, the policymakers should consider adopting a clearer reinvestment policy principles throughout the Portuguese Tax Code. If reinvestment keeps the taxpayer in the same economic position (no cash-out), taxation should be deferred until there is actual liquidity or ability to consume.

© Kore Partners, 2025

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