(Yicai) Aug. 7 -- China needs clearer rules on taxing insurance dividends amid uncertainty over how such income should be treated, tax experts said.

The issue has drawn attention following rumors that Beijing, Hangzhou, and other cities had begun levying individual income tax on dividends from Hong Kong insurance policies. Investment-related insurance returns theoretically fall within the scope of individual income tax, but most regions do not tax such dividends because specific rules are lacking, several tax experts told Yicai.

Under China’s Individual Income Tax Law, resident individuals are subject to a 20 percent tax on interest, dividend, and bonus income earned both domestically and overseas. But the lack of specific provisions for insurance-related income has left uncertainty over which types of income are taxable and how they should be classified.

Relevant authorities should issue detailed policies clarifying whether and how insurance-related income should be taxed, the experts said. Clearer standards would help taxpayers comply with the rules and ensure fair and uniform enforcement nationwide.

Unclear Tax Treatment

There is currently no law explicitly stating that ordinary insurance income is subject to individual income tax, nor is there one expressly exempting it, according to Tian Zhiwei, director of the Institute of Public Policy and Governance at Shanghai University of Finance and Economics.

As a result, domestic tax authorities generally do not tax such income in practice, Tian said. Whether ordinary returns from overseas insurance policies should be taxed remains controversial because of the need for consistent treatment of domestic and overseas policies, he added.

Insurance dividends should theoretically be treated as interest, dividend, and bonus income and therefore be subject to the 20 percent individual income tax, according to Ge Yuyu, an associate professor at the Shanghai National Accounting Institute.

Some local authorities have previously attempted to tax insurance dividends. In the early 2000s, a provincial-level local tax authority asked insurers to withhold and pay individual income tax on dividends from participating insurance policies, which share part of an insurer’s profits with policyholders.

The collection was later postponed because the relevant authorities could not reach a consensus on whether the dividends constituted income actually received by individuals or which tax category should apply.

Investment Income Debate

Under the implementation regulations of the Individual Income Tax Law, interest, dividend, and bonus income refers to earnings individuals derive from holding debt, equity, and similar interests. Some argue that insurance dividends do not fully meet that definition.

From a tax law perspective, insurance payouts triggered by death, critical illness, and similar insured events are not investment income and therefore should not be taxed, Tian said. Investment income, however, should be taxable, he added.

Whether returns from universal life insurance should be classified as investment income remains a matter of debate, Tian noted. Based on international practice, returns from ordinary insurance policies are typically not taxed, while gains arising from policy surrenders, withdrawals, fund transfers, and similar transactions should be taxed as investment income, he said.

Editor: Emmi Laine