Current issues

Life insurance policyholders invest their savings either in euro-denominated policies whose capital is guaranteed, or in unit-linked policies which do not have such protection and are subject to market fluctuations. Authorised since December 1969, such investments were regulated by the Law of 7 January 1981 (paragraph 3 of Article L 131-1). Unit-linked policies are invested in shares or corporate bonds, while euro-denominated funds are essentially invested in government bonds. 

Since the Law No. 2005-842 of 26 July 2005 was enacted, policyholders have been able to switch between euro-denominated funds and unit-linked funds within policies known as "multi-fund policies". Under Article 1 of the Law, such movements do not entail “the fiscal consequences of a termination” of the policy. As the wording of Title 1 indicates, the aim of the legislation was to “encourage the sustainable holding of shares”, three years before the stock market crash.

Initially, policyholders who invested in euro-denominated policies paid annual social security contributions, while those invested in unit-linked policies, including multi-fund policies, were liable for such contributions only on the policy’s termination and were not subject to them in the event of death. 

This structure was amended by Article 18 of the Social Security Financing Law (Loi de Financement de la Sécurité Sociale - LFSS) for 2010. Under these provisions, codified in Article L 136-7 of the Social Security Code, unit-linked life insurance policies are subject to social security contributions "on the death of the insured" (paragraph 3.b of section II).

The paying institution withholds social security contributions from the income of the euro segments of capitalisation bonds and policies or multi-fund life insurance policies under the same rules and subject to the same security interests, privileges and penalties as the fixed withholding amount mentioned in Article 125 A of the French General Tax Code (Code Générale des Impôts - CGI):

“V.- The contribution referred to in paragraph 1 of section I and sections II and IV above is based, verified and collected under the same rules and subject to the same security interests, privileges and penalties as the fixed withholding mentioned in Article 125 A of the CGI. ”

(paragraph 1 of section V of Article L. 136-7 of the Social Security Code) 

According to paragraph 3 of Article 125 A of the CGI, "the withholding is made by the debtor or by the person who arranges payment of the income".

On the death of the insured, the beneficiary of a unit-linked policy must therefore pay, out of the proceeds due, the amounts corresponding to the social security debt accumulated by the insured in a personal capacity on all or part of the income generated by the policy since it took effect. The same applies to the unit-linked part of multi-fund policies. During discussions on the Law, some parliamentarians noted that the text constituted "an extremely serious challenge to the founding principle of life insurance" (National Assembly, Vialatte Amendment, No 118). Commentators on this text point to the infringement of the principle of conferring a right on a third party (stipulation pour autrui), which was until then the basis of life insurance (Leroy, “l’article 18 ou l’atteinte à la stipulation pour autrui” [Article 18 or the infringement of the stipulation pour autrui], Digital Review of Insurance Law, No. 22, September 2011).

Since 2010, the contribution rate has increased from 12.1% to 17.2%. At the time of death, payable contributions may concern all income accumulated since the life insurance policy was taken out. For many old, well-managed policies invested in stocks during the boom years (2012/2017), this income can represent more than half the value of the policy.

Our challenge

We have raised two challenges to this contribution:

• Life insurance beneficiaries pay the contribution even though it is not their debt.
• The contribution constitutes a debt payable by the deceased which, in accordance with Article 768 of the CGI, should be deducted when calculating inheritance taxes  and, incidentally, wealth taxes (impôt de solidarité sur la fortune - ISF) for the year of death.

Who does this affect? 

1. Life insurance beneficiaries who are subject to inheritance tax on the proceeds:

• because premiums in excess of €30,500 were paid on the life of an assured over 70 years of age (Article 757 B CGI) and the policy was entered into on or after 20 November 1991, or
• because the life insurance policy did not include the designation of a beneficiary (Article L 132-11 of the Insurance Code (Code des assurances)).

(II) Other beneficiaries of a life insurance policy who are subject to the tax on insurance and similar agreements (taxe sur les conventions d’assurances et assimilées - TCAS) referred to in Article 990-I CGI who, as they are also heirs to the deceased’s estate, must pay the share of disputed social security contributions after deducting the social security contribution from the TCAS base.

 (III) Other individuals subject to inheritance tax who are not beneficiaries under a life insurance policy but are being sued by the beneficiary of such a policy for repayment of the deceased’s debt of social security contributions paid via withholding from the proceeds due to the beneficiary under the policy.

 Time limits for redress 

•  For the individuals mentioned in (I) and (II):

Heirs may obtain a discharge or reduction of inheritance tax by showing the tax is excessive.

Under Article R 196-1(b) of the LPF, the time limit for challenge expires on 31 December of the 2nd year following that of payment of the tax.

Action may therefore be taken in respect of inheritances where tax has been paid since 2017.

• For the persons mentioned in (III):

Under Article R 196-1(b) of the Book of Tax Procedures (Livre de procedures fiscales – LPF), the time limit for filing a challenge expires on 31 December of the second year following the occurrence of the event giving rise to the claim.

Here, "event" means an event that is likely to influence the merits of the tax, either in principle or in respect of its amount (EC 19 April 2000, No 184502), beyond the control of its originator (CA Nîmes 21 September 2004, No 03/00263). 

In our view, a claim against an estate by the beneficiary of a life insurance policy for repayment of the deceased’s social security debt that has been withheld from the beneficiary’s assets constitutes such an event. The claim must therefore be filed within the five-year limitation period. This therefore concerns individuals who have paid such contributions since 2014.