It is common for companies to include, among the benefits provided to employees, health or life insurance in favor of the company’s workers. 

Historically, the SII had interpreted the tax treatment of these policies as follows:  

1. The contracting company was not entitled to VAT input tax credit for the VAT paid to insurance companies in connection with these policies.

2. The premiums paid would constitute additional compensation for the employee, deductible as an expense under that concept. 

In a recent change of criterion, the SII, through Ruling No. 961 of May 16, changed its interpretation regarding the treatment of the VAT paid on these policies. Accordingly, the SII now takes the view that taxpayers may deduct the VAT on the policies as input tax credit “to the extent that they benefit only workers who perform duties that the taxpayer assigns to VAT-taxable operations and that cover risks inherent in or associated with the development of such line of business or activity.” Likewise, the SII reaffirms that the premiums paid constitute additional compensation deductible under No. 6 of Article 31 of the Income Tax Law and “to the extent that the remunerated activities are associated with the interest, development, or maintenance of the business line,” in addition to the general legal requirements.

Consequently, companies that had been following a criterion of not recovering the VAT associated with these expenses may modify that criterion in accordance with this new interpretation. This means a lower cost for these benefits, since the VAT borne on them can now be recovered.