Tax Liability

Tax liability insurance is a bespoke insurance policy which effectively ring-fences the tax issue and removes it from the sale agreement negotiation.

An identified tax issue can often lead to an aborted M&A process with sellers and buyers often disagreeing on the gravity and quantum of the issue. Tax liability insurance is a bespoke insurance policy which effectively ring-fences the tax issue and removes it from the sale agreement negotiation. This means that the seller does not have to give a warranty or a specific indemnity on the tax issue and conversely it can prevent the buyer using the tax issue as a reason to “price-chip”.

Why Purchase Tax Insurance?

Tax insurance, also known as tax indemnity insurance or tax opinion insurance, is most often used:

  • To provide protection if a taxing authority challenges a historical tax position taken by a target entity that is either assumed by the buyer or retained by the seller via an indemnity.
  • To ensure that a particular tax structure used in a transaction has its intended effect.
  • To provide protection when there is no clear guidance on a specific tax issue, and a party is unwilling to accept the tax exposure.

In addition to its use in M&A transactions, tax insurance can be obtained on many tax positions a company has taken historically, or is planning to execute, in case they are reviewed by tax authorities as part of the company’s ongoing operations.

A tax insurance policy generally covers the tax liability for seven years, along with any possible fines and penalties, interest, legal contest costs, and tax gross-up. All forms of direct and indirect taxation can be covered, including:

  • Corporate income tax.
  • Personal income tax.
  • Capital gains tax.
  • Property tax.
  • Sales and use/value added tax.

For more information on tax insurance, download PDF below or contact your Marsh representative.