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Column by Mary Oliva

International Wealth Protection Clarifies and Validates the Tax Benefits of Private Placement Life Insurance in Peru

By Mary Oliva , Miami

The utilization of Private Placement Life Insurance has been considered as a planning strategy for wealthy Peruvian families as a result of the enactment of Peru’s Controlled Foreign Company (CFC) Rules Regime December 31st, 2013.

Since then, most of the highly reputable Peruvian law firms agree that Private Placement Life Insurance should be considered as a planning strategy for wealthy Peruvian families and have been seeking the advice of International Wealth Protection. After attending multiple tax planning meetings with Peruvian clients and their tax advisor where Private Placement Life Insurance was a major point of discussion, most concluded with a sense of ambiguity on the subject since this norm left one unanswered question that was the premise of the many disclaimer pages that accompanied every legal opinion issued by the most renowned attorneys: “Will the Peruvian tax authority, SUNAT (Superentendencia Nacional de Administracion Tributaria) back the law as outlined by the Peruvian Superintendent of Banks and Insurance (SBS)”? 

Knowing the unparalleled benefits of Private Placement Life Insurance which make it a viable and sustainable solution proven to be effective in highly regulated and taxed jurisdictions as are the USA and Europe, International Wealth Protected decided to walk the talk and truly put the client interests first and take the appropriate steps to validate its legal recognition directly from the SUNAT knowing that anything other than a fully favorable response would obliterate the offering as we knew.  We debated the strategy with opponents, but in the end decided to proceed in the best interest of the Peruvian client and the integrity of the insurance industry in the long term.  The consultations made to the SUNAT were based on the tax implications for life insurance policies issued by foreign insurance carriers regarding the insurance proceeds paid to Peruvian residents and the partial withdrawals to the policy executed by the policy holder.

On July 2, 2018, one year after the original consultation was made by International Wealth Protection with the support of EY Peru and the Lima Chamber of Commerce, the SUNAT finally issued a response to every question made, citing specific laws with a favorable conclusion.

The SUNAT confirmed that regardless of the issuing jurisdiction of the insurance carrier, the death benefit paid to any natural Peruvian resident is not subject to Peruvian Income Tax.  As relates to partial withdrawals on a life insurance policy issued by a foreign insurer, the SUNAT confirmed that Peruvian Income Tax will be applicable to the capital gains appreciated within said withdrawal.  If there are no partial withdrawals from the Insurance Policy, the accumulated gains and returns will be completely under the tax deferment regime.

While many Private Placement Life Insurance representatives are popping the champagne and utilizing the response to our inquiry (which they strongly opposed), International Wealth Protection remains cautious when collaborating with the client’s most trusted advisors.

We advise and recommend the following to those considering the implementation of Private Placement Life Insurance for Peru’s most wealthy residents. Please make sure to involve an expert with the ability to:

•    Respect the two main elements that allow the product to pass the “substance over form” test which are Investor Control and Risk Shift
•    Practice objectivity by representing several providers and proposing 2 to 3 product alternatives to the client
•    Transmit full understanding of the solution including cross border implications and not a specific product
•    Implement tailor made products given the unique characteristics of a wealthy client
•    Understand this is a niche product designed for the ultra-rich and is not a retail offering
•    Provide design flexibility, institutional pricing, and immediate revocability without surrender charges.

The inability to provide these critical factors is inconsistent with industry standards and can inject vulnerability into the transaction.

Honoring that “doing what is right is always the right thing”, I am pleased by the outcome of our endeavor and extremely happy to share this great accomplishment with those that can benefit from it. 

For your information, the response is now published on the SUNAT website.

Column by Mary Oliva, President- International Wealth Protection
 

 

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