Contents
This section describes how the basis of taxation is reduced for tariff-based plans.
The section covers
- Reduction fraction
- Provisions at the end of the year of taxation
- Premium reserve at the end of 1982
- Example of calculation of a reduction fraction
Reduction fraction
The basis of taxation is reduced based on the ratio between the lower of either the provisions at the end of the year of taxation or the premium reserve determined at the end of 1982 and the value of the provisions at the end of the year of taxation in the individual plan.
This means that the premium reserve as per 31 December 1982 and the provisions at the end of the year of taxation are compared every year. If the provisions at the end of the year of taxation are lower than the premium reserve as per 31 December 1982, the current provisions for the year must be used as the numerator.
The basis of taxation determined under Section 4 of PAL is reduced by the following fraction:
|
The lower of the provisions at the end of the year
of taxation and the premium reserve at the end of 1982
The provisions at the end of the year of taxation |
Provisions at the end of the year of taxation
The value of the provisions is determined as the life insurance provisions or the pension provisions plus a proportionate share of the collective bonus potential in relation to the relevant pension plan.
When determining the life insurance or pension provisions for the year of taxation, a proportionate share of the collective bonus potential is exempt if a proportionate share of non-allocated amounts contained in the bonus fund at the end of 1982 is also exempt.
The provisions are determined at the end of each year of taxation. In connection with such determination, any state guarantee or assurance of official loss coverage is deducted.
Premium reserve at the end of 1982
In relation to each policy or pension plan, the premium reserve (provision) at the end of 1982 is determined as the life insurance provisions or the pension provisions plus allocated bonus which has not been transferred to the premium reserve and a proportionate share of non-allocated amounts contained in the bonus fund at this time (31 December 1982). Provisions regarding annuities without bonus entitlement taken out before 1 May 1982 are not included in the calculation.
The provision or the premium reserve is determined at the end of 1982. In connection with such determination, any state guarantee or assurance of official loss coverage is deducted.
The value determined on 31 December 1982 is a fixed value which cannot be revalued.
See also
See also section D.1.3.1, Final calculation of the basis of taxation and the taxable part thereof as well as declaration and payment of PAL tax upon the termination of a pension plan, and D.1.6, Disclosure of information etc. in connection with transfers under Section 41 of PBL.
Example of calculation of a reduction fraction
This is an example of the calculation of a reduction fraction.
Provision at the end of a year of taxation
In the following, it is shown how provisions are calculated at year end for a year of taxation. The example is based on typical financial statements for a life insurance company.
|
Financial statements
31 Dec. 2008 |
Total |
Allocated
provisions |
Non-allocated
provisions |
|
Total life insurance provisions which can be kept exempt |
65,000 |
59,000 |
6,000 |
|
Annuities without bonus entitlement |
-15,000 |
-14,000 |
-1,000 |
|
Exempt provision |
50,000 |
45,000 |
5,000 |
|
Collective bonus potential |
10,000 |
0 |
10,000 |
|
Total |
60,000 |
45,000 |
15,000 |
|
The non-allocated provisions - an amount of 5,000 - which only concern
policies covered by Section 10(2) of PAL consist of the following: |
|
Administration reserve |
1,250 |
|
Extra reserve in respect of conversion of current policies |
125 |
|
Collective reserve in respect of premium exemption |
625 |
|
Transferred premium |
1,875 |
|
Outstanding claims provisions |
625 |
|
IBNR reserves |
500 |
|
Total |
5,000 |
|
The collective bonus potential - an amount of 10,000 - consists of the following: |
|
Collective bonus potential in respect of policies, cf. Section 10(2) of PAL |
8,000 |
|
Provisions in respect of annuities without bonus |
1,500 |
|
IBNR reserves |
500 |
|
Total |
10,000 |
For each individual policy which is still effective at the end of the year of
taxation, the amount which can be included in the above-mentioned comparison
is calculated as follows:
|
Of the total non-allocated provisions - a total of 45,000 - the insurance provision at the end of the year of taxation can e.g. be |
7,000
|
Of the collective bonus potential - a total of 10,000 - only an amount of 8,000 concerns policies covered by Section 10(2) of PAL. As a consequence, only this amount can be included in the allocation.
The proportionate share of the amount of 8,000 in relation to this policy which was also effective at the end of 1982 is calculated as follows:
|
8,000 * 7,000 |
= |
|
|
45,000 |
1,244 |
|
Total |
8,244 |
Premium reserve at the end of 1982
It is shown in the following how the 1982 reserve with supplements is calculated at the end of 1982. The example is based on typical financial statements for a life insurance company.
|
Financial statements
for 1982 |
Total
|
Allocated
provisions |
Non-allocated
provisions |
|
Total provisions |
32,000 |
25,500 |
6,500 |
|
Annuities without bonus entitlement |
-2,000 |
-1,500 |
-500 |
|
Exempt provision |
30,000 |
24,000 |
6,000 |
|
Bonus fund |
3,000 |
2,000 |
1,000 |
|
Total |
33,000 |
26,000 |
7,000 |
|
The non-allocated provisions - an amount of 6,000 - which only concern
policies covered by Section 10(2) of PAL consist of the following: |
|
Administration reserve |
3,100 |
|
Extra reserve in respect of conversion of current policies |
1,700 |
|
Collective reserve in respect of premium exemption |
150 |
|
Transferred premium |
800 |
|
Outstanding claims provisions |
200 |
|
IBNR reserve |
50 |
|
Total |
6,000 |
|
The non-allocated share of the bonus fund - an amount of 1,000 - consists
of the following: |
|
Collective bonus potential in respect of policies, cf. Section 10(2) of PAL |
700 |
|
Provisions in respect of annuities without bonus entitlement |
290 |
|
IBNR reserves |
10 |
|
Total |
1,000 |
For each individual policy which is still effective at the end of the year of taxation,
the amount which can be included in the above-mentioned comparison is calculated as follows:
|
Of the total allocated provisions - a total of 24,000 - the insurance provision at the end of 1982 can e.g. be |
4,000
|
|
Allocated bonus can e.g. be |
400 |
Of the non-allocated amounts in the bonus fund - a total of 1,000 - only an amount of 700 concerns policies covered by Section 10(2) of PAL. As a consequence, only this amount can be included in the allocation.
The proportionate share of the amount of 700 in relation to this policy which was also effective at the end of the year of taxation is calculated as follows:
|
700 * 4,000 |
= |
|
|
24,000 |
117 |
|
Total |
4517 |
If this concerns the same policy in both years, the comparison must be made between the amount determined of 8,244 (provisions at the end of the year of taxation) and the amount determined of 4,517 (premium reserve at the end of 1982) in the two examples. The lower of the two amounts is used in the numerator of the reduction fraction. In this case, 4,517. Provisions at the end of the year of taxation of 8,244 must be used in the denominator of the reduction fraction.
The fraction is as follows:
|
|
4,517 (premium reserve at the end of 1982) |
|
|
|
8,244 (provisions at the end of the year of taxation) |
|
The basis of taxation is therefore reduced by 54.8 per cent. Note
If the provisions at the end of the year of taxation had been lower than the premium reserve, e.g. 4,000, this amount should have been used in the numerator of the reduction fraction. |