Tax insurance is traditionally not a product that M&A practitioners would be familiar with. However, this has changed over the past two years not least due to the increasingly established Warranty & Indemnity (W&I) insurance solution which has increased trust in the insurance market on the part of both clients and M&A professionals.
Inquiries for tax insurance were still marginal in the years prior to 2017. Today, however, growth rates in the three-digit percentage range can be observed.
What is behind the rise in tax insurance and when is it used?
In the past few years, W&I insurance has become a firmly established feature in company acquisitions. In broad summary, these policies cover claims arising from a breach of the warranties and indemnities given by the seller in the sale and purchase agreement, which were previously unknown to the buyer.
Tax insurance, on the other hand, covers already known tax risks. Tax due diligence is carried out on a regular basis, particularly in the context of corporate transactions. This often raises the question of who should bear the economic risk of the identified tax risks. If different opinions exist regarding the qualification and quantification of the tax risk, this can sometimes lead to conflict between the contracting parties. These problems can be avoided by means of an appropriate insurance solution, as the parties in this way remove the respective risks from the contract negotiations.
There is no typical application of tax insurance. In principle, it can be used for all types of tax risks.
However, there is one special feature that needs to be taken into account: risks that are mainly factual in nature cannot be insured. In order to provide a solution, the insurer will look to identify a tax risk that is attributable to purely legal uncertainty. It is recommended that the tax advisor prepares an expert opinion on the respective tax risk at an early stage. This will considerably speed up the process up to the conclusion of the insurance policy.
Insurance premium, duration and timeframe
Insurance for tax risks are tailor-made products. Each risk profile is different and, accordingly, there is significant variety to the premium payable. However, the potential for the individual risk to occur has an influence on the size of the respective premium. Currently, this is between three and ten percent of the sum insured. Due to the increasing demand, however, a development of the insurance premium in favor of the policyholder can also be seen.
The term of tax insurance is usually seven years. Some insurance companies offer an extension of up to ten years.
The policyholder should expect at least fifteen to twenty working days from the official commissioning of the insurer until the insurance is taken out.
Insurance against known tax risks has developed into a reliable product in support of M&A transactions. Demand for solutions to transactional tax problems remains high, and so it is foreseeable that further development and innovation in this area will continue