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Tax insurance: De-risking the refinancing of portfolio companies

The tax insurance product has evolved tremendously over previous years to become a valuable tool for managing tax risks.

Tax insurance: De-risking the refinancing of portfolio companies

As high interest rates and a global economic slowdown continue to hinder dealmaking activity, many private equity funds are holding their portfolio companies for longer than initially anticipated.

Consequently, focus has increased on refinancing transactions due to debt facilities approaching maturity and the desire to create a liquidity or repatriation event. These transactions may introduce various tax risks that can result in unforeseen tax leakage and adversely impact investment returns. Tax insurance is an effective way of addressing these risks to maximise the repatriation of cash proceeds to shareholders, preserve internal rate of return (IRR), and provide comfort to lenders when negotiating financing packages.  

Case study: Tax risks during the refinancing of a portfolio company

A European portfolio company planned to refinance existing third-party debt facilities. Seeking to use a portion of the new debt proceeds to fund a repatriation to investors by way of a repayment of share premium, the company encountered the following tax risks:

  1. Deductibility of interest

    The relevant tax law contained a number of interest deductibility limitation provisions. As a portion of the new external debt was funding a repayment of equity to shareholders, there was concern that the appropriate tax authority may challenge the deductibility of all or a portion of the new external debt financing costs. Although the risk of a successful challenge was regarded as low by their advisors, it could not be ruled out.

  2. Withholding taxes

    For the circumstances in question, it was generally accepted that a repayment of share premium to a non-resident entity should not give rise to any withholding taxes. However, there were concerns that this may be re-classified as a dividend distribution for tax purposes — potentially within the scope of dividend withholding tax. Any withholding tax issues from re-classification could be mitigated under the relevant double tax treaty — provided the conditions for relief were met. One of these conditions required the recipient to have beneficial ownership of the income, and while the company had a supportable filing position in this regard, there were concerns that the relevant tax authority could challenge this.  

Tax insurance solution

Both tax risks were insured to protect the company from any successful challenge by the relevant tax authorities. In addition to the estimated tax liability, interest, and penalties the tax insurance policies also covered any risk of advance tax payments being required in case of dispute, and defence costs and gross-up (in case the insurance pay-out was taxed in the jurisdiction of the insured).

Regarding the withholding tax risk, the average cost of the insurance was between 1% and 2% of the insurance limit and between 2% and 3% for the interest deductibility risk (both one-off payments of insurance premium). Additionally, the excesses and retentions for both policies were low.

Other non-M&A tax risks

In addition to the refinancing risks considered above, other tax risks — unrelated to M&A activity and typically insurable — include the following:


Transferring tax risks such as the risk of tax neutral treatment not applying to an insurer.

Cash repatriation

Tax insurance can be used to protect companies and investors against taxes being applied to cross-border flows such as dividends, interest, and royalties by mitigating withholding tax risks. This can be achieved by insuring the application of tax treaty provisions.


Tax insurance can help businesses gain certainty for tax treatment on day-to-day operating matters such as tax residency, VAT, and transfer pricing, for example.

Balance sheet provisions

Tax insurance can be used to reverse provisions surrounding uncertain tax positions where the underlying matter is insured.


The tax insurance product has evolved tremendously over previous years to become a valuable tool for managing tax risks — including those which fall outside of M&A activity. Therefore, private capital funds are actively encouraged to consider tax insurance as a method to effectively manage tax risks affecting their portfolio companies.

Our people

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Leon Steenkamp

Head of Tax Insurance

  • United Kingdom

Moujeeb Thami

Moujeeb Thami

Senior Tax Broker, Private Equity and M&A

  • United Kingdom