Affirmation of the Determination of Taxable Income for Life Insurance Companies

On 8 April 2019, the Director General of Taxes issued the latest provisions regarding taxation of
insurance claims/ benefits in life insurance companies through the Directorate General of Taxes Circular
Letter Number SE-08/PJ/2019 concerning Claim/Benefits of Insurance for Life Insurance Companies
(SE-08/PJ/2019).
Formerly, the rules pertaining to income tax on life insurance only referred to the Director General of
Taxes Circular Letter Number SE-97/PJ/2011 concerning the Imposition of Income Tax on the Formation
or Accumulation of Premium Reserve Funds for Taxpayers Engaged in Life Insurance Business that is
Deductible from the Gross Income (SE-97/PJ/2011).
However, it should be understood that SE-08/PJ/2019 which constitutes this new provision is not a
substitute for the previously applicable provisions. For future implementation, these two provisions will
complement one another. The promulgation of the latest regulation is rather based on providing certainty
in terms of Taxable Income for life insurance companies, specifically the affirmation of how to impose
taxes on insurance claims/ benefits for life insurance companies.
This regulation states that at the end of each year, the premium reserves formed by the company can still
be used to pay claims for benefits that are due. Furthermore, premium reserves can also be paid in the
following year in case of other causes. The amount of premium reserves will then be adjusted to the
calculations of an actuarial approved by the Financial Services Authority (Otoritas Jasa Keuangan/OJK).
Furthermore, in the event of claims or benefits from insurance, the costs will then be charged to the initial
balance of the year from the premium reserves. In the event of a shortfall of funding from a life insurance
company to pay insurance benefit claims by the policy owner, the shortfall in payment is concurrently
calculated as the current year cost.
Having exposed the concept of establishing premium reserves and the treatment of costs as a burden on
the company in the event of any benefit claim, this Circular Letter confirms the principle of how to
calculate the taxable income. There exist three conditions for estimating taxable income in a life
insurance company if a claim for these benefits occurs as summarized in the following table.
Table Method of Determining the Type of Taxable Income in the Case of Payment of Claims for the
Benefits of Life Insurance

No Condition The Treatment for Premium Reserves

1 The initial balance of premium reserves of the The decrease in premium reserves is still
year which has been subtracted by the payment considered as income for the current year
of insurance claims/benefits in the current year
has decreased compared to the premium
reserves calculated by actuaries at the end of the
year.

2 The initial balance of premium reserves of the
year which has been subtracted by the payment
of insurance claims/benefits in the current year
has increased compared to the premium
reserves calculated by actuaries at the end of the
The increase in premium reserves is
considered as a cost that can be charged in
the current year.
Note: the increase in premium reserves
 No Condition The Treatment for Premium Reserves

year. cannot be considered as a cost if the

increase is due to the formation of premium
reserves from investment returns that have
been subject to income tax with separate tax
mechanisms that are final and/or not tax
objects.

Source: SE-08/PJ/2019