Tax Liability of a Company Under an Arrangement Covering Keyman Insurance Policies

April 19, 1991 BIR RULING NO. 067-91 24 000-00 067-91 Gentlemen : This refers to your letters dated November 5 and December 1, 1990 stating that your company is desirous to apply for Keyman insurance policies to cover its executives in the following arrangement: "1. It shall avail of a loan from an insurance company to an amount estimated to provide enough funds to pay present and future premiums. "2. An equivalent amount shall be deposited by either the same borrowing company, other corporations substantially owned by the same stockholders of the borrowing company or by the stockholders themselves as individuals to the same insurance company as deposits for future premiums. "3. The company pays agreed interest for the borrowed funds to the insurance company and correspondingly deducts this from its deposits participate in the earnings of the insurance company after deducting premiums and pay taxes accordingly. "4. Company deducts premiums paid for Keyman insurance from its gross income taxes. (Sec. 30 (a) Tax Code, BIR Ruling Dec. 21, 1951). However, said premiums shall be considered income to the proposed insured. (BIR Ruling August 5, 1953)." that such arrangement was concurred in because it is estimated to be more advantageous to invest your own funds in other investment programs such as treasury bills and mutual funds in order to generate higher yields than the expected dividends derive from participating policies; that the alternative left to you is to secure premium deposit funds from either a bank or the same insurance company; that of the two sources, you tend to favor the latter due to lower interest costs; and that your computation shows that despite the spread of the cost of money between what you borrow and what you shall earn from dividends of participating policies, the investment of your own funds in other investment programs would provide you an edge in the long run, not to speak of the protection guaranteed your executives thru this program. Based on the foregoing representations, you now in effect request a ruling as to what are your tax liabilities under the aforestated arrangement should there be any. In reply, please be informed that except for revenues to be derived from your future fund deposits participating in the earnings of the insurance company after deducting premiums being subject to the 35% income tax imposed under Section 24 (a) of the Tax Code, as amended, this Office finds that you have no other tax liability under the aforestated arrangement. Very truly yours, (SGD.) JOSE U. ONG Commissioner