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Marsh Private Equity and M&A Benelux Transactional Risk Alert

Dutch tax treatment of W&I premium and payments

Although warranty & indemnity (“W&I”) insurance has been widely used in the M&A market for many years, the tax treatment of premium and payments under W&I insurance policies has remained uncertain in many European countries

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Although warranty & indemnity (“W&I”) insurance has been widely used in the M&A market for many years, the tax treatment of premium and payments under W&I insurance policies has remained uncertain in many European countries.

Fortunately, the Knowledge Group of the Dutch tax authorities published its first position on this topic back in October 2022, and recently issued a further clarification on the Dutch tax treatment of W&I insurance related litigation costs.

Acquisition and disposal costs

Generally, costs relating to the acquisition or disposal of shares are not deductible based on the Dutch participation exemption rules.

Dutch case law has further clarified that there should be a direct causal link between the acquisition/disposal of shares and costs, in order for such costs to be non-deductible. A direct causal link implies that (i) without the acquisition/disposal such costs would not have been incurred and (ii) the costs actually contributed or were required for making the acquisition/disposal.

The question therefore arises whether the premium and payments under a W&I insurance policy have the required direct causal link to the acquisition of shares.

Tax treatment of premium and payments under W&I policies

In October 2022, the Knowledge Group of the Dutch tax authorities published their internal position on the tax treatment of premiums and payments under W&I insurance policies (link). This was the result of a request under the Wet Openbaarheid Overheid (Government Information Public Access Act). Although this cannot be considered legislative policy, the publication provides useful insight into the tax authorities’ internal policy.

The position of the Dutch tax authorities is as follows:

  1. Premiums are non-deductible for Dutch corporate income tax purposes, since these are considered to be acquisition or disposal costs (as applicable) relating to a shareholding.
  2. On the other hand, any (claim) payments under a W&I insurance policy are exempt from Dutch corporate income tax.

The publication further explains how this would be applied to the different policy types:

  • Buy-side policy: premiums are non-deductible and payments are exempt for the buyer.
  • Sell-side policy
    • direct payment to buyer: premiums are non-deductible for seller and payments are exempt for buyer.
    • payment to seller, with an immediate onward payment to buyer: premiums are non-deductible for seller and payments are exempt for buyer.

Important to note that this only relates to W&I insurance policies and the tax treatment for other insurance policies may differ and should be assessed on a case-by-case basis.

Tax treatment of litigation costs for W&I policies

On 14 March 2024, the Dutch tax authorities published their position on whether litigation costs relating to a W&I insurance policy are deductible for Dutch corporate income tax purposes (link).

A W&I insurance policy was placed in relation to the acquisition of a target. Subsequently, the buyer filed a claim with the insurer, which was denied by the insurer, and ultimately resulted in a litigation procedure. The court decided against the buyer and ordered the buyer to reimburse the litigation costs incurred by the insurer.

The Dutch tax authorities take the position that, although the litigation costs would not have been incurred if the buyer had not acquired the target, such costs are not considered to have contributed to the acquisition as such, i.e. the costs were not required for completing the acquisition. Therefore, the litigation costs incurred pursuant to the W&I insurance policy are considered deductible.

If you would like to know more about the above or help with W&I and/or Tax insurance queries, please contact us.

Contact us

Laura Grosscurt

Laura Grosscurt

Vice President Tax Insurance Benelux, Private Equity and M&A, Marsh Specialty

  • Netherlands

Jess Hogan

Jess Hogan

Head of Transactional Risk Benelux, Private Equity and M&A, Marsh Specialty

  • Netherlands