Capitalisation policies in France
Expert’s voice: questions to Olivier Roumélian
« Capitalisation policies have their rightful place alongside life insurance policies. It is simply a matter of being able to use capitalisation policies to their best advantage and intelligently, respecting each party’s wishes and interests. »
Q1. Could you tell us about capitalisation policies in France?
In France, capitalisation policies are governed by the insurance code, in the same way as life insurance policies, from which they differ because they have no insured person/s and no beneficiary/ies. For many years these policies had an advantage: a tax advantage. But they were also subject to a constraint. In practice one could benefit from the tax advantage while overcoming the technical constraint imposed on it. What has happened is that, today, as we speak, the tax advantage has disappeared but so has the constraint. The question is: Do capitalisation policies still offer advantages? The answer is: Yes because, as their name implies, these policies rely on the way capitalisation works; namely that the profits generated in the policy accumulate, but are neither transferred to the policyholder nor - provided there is no surrender by the policyholder - are they taxed.
Q2. Are there any particular points relating to subscription (e.g. in the case of dismemberment)?
In French law, ownership consists of usufruct and bare ownership. Anything can be dismembered, whether it is physical or intangible. One can dismember the ownership of a building, just as one can dismember the ownership of a securities portfolio, for example. Dismemberment of ownership is a technique which is used for the transfer of inherited assets. In France, this is certainly what works best with a life insurance policy. Applying dismemberment of ownership in a life insurance policy at the subscription stage is complicated, but what works well is the dismemberment of ownership in beneficiary clauses. Capitalisation policies do not have a beneficiary clause since there is no insured person. On the other hand, their interest lies in dismembering ownership of capitalisation policies, either ab initio1 or by redeploying the dismembered funds resulting from entering into a separated beneficiaries’ clause in a life insurance policy. The end result is a policyholder in usufruct, and one or more policyholders in bare ownership, who will become owners at a later date when the usufruct is extinguished. This technique was used in the past to solve a fiscal constraint which no longer exists today. Despite all this, it is still a technique which ought to be used because it is of significant interest in estate planning.
Q3. This type of policy is sometimes taken out by legal entities. Could you explain?
A clear distinction should be drawn between two types of legal entity: non-commercial partnerships holding family assets, and industrial and commercial companies subject to CT. In the case of non-commercial partnerships, the technique is used as an instrument for the transfer of assets. A non-commercial partnership takes out a capitalisation policy in full ownership, and its partners are usually the owners of rights in usufruct and bare ownership. On the death of the usufructuary full ownership of the partnership’s shares is reconstituted at the level of the bare owners. The distinguishing feature is that the usufructuary’s rights and obligations must be well managed, particularly his receipt of the income and the taxation of this income. For this, we recommend that an agreement be entered into between the partners of the non-commercial partnership. So much for the private transfer of assets. For industrial and commercial companies, taking out a capitalisation policy is an investment of cash.
As mentioned earlier, the policy is based on the capitalisation technique which means that the policyholder does not receive any income, whether he is an individual or a legal entity. However, when dealing with such very specific schemes, the tax authorities consider that tax must be imposed actuarially, i.e. it must be spread out over the whole term of the policy, provided that certain conditions are respected.
In conclusion, capitalisation policies have their rightful place alongside life insurance policies. This is true whether we are talking about non-commercial partnerships, industrial and commercial companies subject to CT2 or individuals, or about the transfer of assets or dismemberment of ownership; and, indeed, whether we are talking about capitalisation. It is simply a matter of being able to use capitalisation policies to their best advantage and intelligently, respecting each party’s wishes and interests.
1 Ab initio is a Latin phrase meaning since the beginning, or at the start.
2 CT: corporate tax.