Tax Insurance Liability: insurance to cover tax contingencies

Introduction and definition

Insurance to cover tax contingencies is becoming more popular. Companies and funds acquired by companies are increasingly contracting policies for possible inspections and sanctions by the tax authorities.

The use of tax policies has increased in recent years in Europe and, above all, in Spain, due to the increase in M&A operations involving foreign funds, uncertainty about potential changes, increasing numbers of inspections by the Tax Agency and delays in the responses of the Directorate General for Taxation (DGT).
Tax insurance protects you against known tax contingencies. It covers losses arising from differences between the tax treatment expected in connection with an event and the decisions of the tax authorities. Tax Insurance protects the taxpayer against tax contingencies identified in the framework of an M&A operation or in the day-to-day activities of a company.

Tax insurance protects you against known tax contingencies. It covers losses arising from differences between the tax treatment expected in connection with an event and the decisions of the tax authorities. Tax Insurance protects the taxpayer against tax contingencies identified in the framework of an M&A operation or in the day-to-day activities of a company.

When can it be useful? 

This type of insurance can be useful in the following cases:

• If Due Diligence reports have detected a tax contingency
• If a specific tax risk needs to be transferred and delimited
• To provide greater certainty in cross-border transactions
• If uncertain or complex tax legislation means that it is difficult to determine how it applies to a transaction

What does it cover?

• Tax liability insurance can help a company reduce or eliminate its exposure to the identified risk of a loss arising from a tax authority successfully contesting the tax treatment assumed to be correct for a proposed or previous transaction.
• The risk that tax authorities may question the way a certain operation was treated for tax purposes. These situations can arise in M&A processes, sometimes posing a threat to the agreement, or in normal transactions carried out by large multinational groups, such as non-transactional corporate risk operations (such as restructuring, distribution of dividends abroad, transfer price exposure).

Premises for a risk to be insurable

• Low probability but high impact (large amount)
• Contingencies arising from the interpretability of the law
• There must be a solid legal basis to defend the tax position being taken

Types of risk that are insurable

• European Parliament and residence matters
• Tax withholdings on interest/dividends
• Tax-free reorganisation/demergers
• Exemption from participation
• Availability / existence of NOLs / base cost
• Transfer prices

The process

Claim

Claims in the event of an incident must be notified within the period of validity of the policy, although the process of resolving the claim need not be completed within that period.