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Mergers & Acquisitions

A deep understanding of organisations, their people,
culture and risk profile.

Tax Liability Insurance

What is Tax Liability Insurance?

Tax Liability insurance is designed to transfer a known, but uncertain, tax liability from a company’s balance sheet to an insurance company. The insurance indemnifies the policy holder for financial loss arising from a successful challenge from a tax authority, removing uncertainty around potential tax liabilities.

For M&A transactions, policies are available either pre- or post-transaction. Tax Liability insurance is also available on a standalone basis, for example as part of an intra-group or pre-IPO reorganisation.

Specific tax cover can include:

  • Defence or contest costs
  • Additional tax deemed due to tax authorities
  • Interest, fines and penalties (to the extent insurable).

Cover is available across a wide range of jurisdictions and industry sectors. When considering requests for tax liability cover, insurers will look at residual risks relating to known tax issues as well as the tax structure of the acquisition itself.

Who should buy Tax Liability Insurance?

Tax Liability insurance is normally bought in the context of investments or M&A transactions where there are questions over the validity of a tax position, usually uncovered during the due diligence process.

Benefits of Tax Liability Insurance:

A tax liability insurance policy can facilitate a transaction by:

  • Providing certainty and managing negative financial impact by transforming potential tax liability into a quantified insurance cost, allowing the issue to be accounted for precisely
  • Enhancing or preserving the value of a business or a particular asset; and
  • Enabling a solution where parties do not want (or do not have time) to obtain prior clearance from tax authorities.

Examples where Tax Liability Insurance can be provided include:

  • Availability of substantial shareholding exemption(s) in relation to a disposal of shares
  • Categorisation of asset sale vs business sale
  • Residency issues
  • Debt for equity swaps
  • Secondary tax liabilities (including VAT Groups)
  • Stamp duty land tax group relief
  • Tax charges arising on the disposal of loan notes
  • Tax exempt demergers
  • Withholding tax on overseas dividend payments
  • Trading versus investment risk
  • Tax residency
  • Transfer pricing.