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Tax Indemnity Insurance
Tax Indemnity Insurance is a specialist product designed to indemnify the insured for any additional tax that becomes due following a business sale or restructure. At present, this insurance is most relevant in mergers and acquisitions where the parties are unable to satisfactorily allocate the tax risks between themselves. This can result in deadlock so a key selling point of the product is its ability to facilitate the completion of transactions that might otherwise flounder. This could apply, for example, if a vendor is not prepared to indemnify the purchaser against an unfavourable tax outcome.
By taking out Tax Indemnity Insurance, the insured effectively gains certainty in areas where there is uncertainty in the potential application of tax laws. Areas where Tax Indemnity Insurance may be invaluable are:
• Protecting against successor liability issues in an M&A where the acquirer is concerned about a historic tax position taken by the target company or its consolidated tax group.
• Protecting a Group's tax position after reorganization - for example a hive down, demerger or disposal.
• Where there could be tax consequences from a change in ownership.
• Following intra-group transfers or reorganisations and the CGT consequences.
• Payroll tax issues in the UK resulting from equity participation by management in an MBO.
• Where parties do not wish to obtain prior tax authority clearance because of timing or confidentiality issues.
However, there are areas where this insurance is typically not available and these include:
• Promoter driven, repetitive or purely tax motivated transactions with no independent economic or commercial purpose.
• Insurance against legislative changes.
• Tax events in unstable political or legislative systems.
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