Throughout the CEE region there are many types of insurance that are frequently used in commercial M&A transactions that are considered to be transactional risk products. Insurance helps manage risk in transactions and can be as simple as overcoming a specific need or problem to transferring liability or the sophisticated structure of the deal between parties. Insurance provides clarity, simplicity and security.
In recent years the insurance market has grown and become more sophisticated. The rise of more specialist products for the M&A market means it can be a challenging landscape to navigate. There are more insurance companies and managing general agents offering insurance of different types. Increasingly, clients are turning to insurance brokers to find the right insurance for their transactions. An insurance broker has the market knowledge and relationships which can help the client to procure insurance.
At REassurance we are experts in finding insurance solutions for our clients. An unparalleled track record of understanding our clients’ needs within the demanding market, our team has many years of experience in finding solutions for managing risks relating to the sector. Our team has broad experience in real estate and tax in the CEE region, which helps to facilitate the transaction process for the clients.
This guide is our introduction to explain the key concepts and benefits of tax insurance. If you have any questions or would like to know how insurance can help, please contact one of our experts
Product Information
Taxation is one of the most politicised areas of law and therefore frequently subject to change. This means that businesses and their advisors have the ever more complex job of keeping up to date with a vast amount of frequently changing rules. Tax insurance is a developing insurance market. The scope and availability of cover is evolving and there is multiple tax risk that can be covered by insurance. Just to name a few, it is possible to obtain cover for the tax, interest, penalties, defence costs and gross-up in the event the insurance proceeds were to be subject to tax.
In the CEE this is an area we are seeing an increase in demand as part of the transactional risk insurance process. This is driven by a number of factors, but primarily the delay of up to 6 months in getting a satisfactory response from the tax authorities.
Below we describe the key concepts and benefits of tax insurance
Cover
Tax liability insurance can reimburse an insured for taxes, interest, insurable penalties, and the costs of contesting or defending one or more covered tax positions. If due diligence has identified a potential tax issue it can often create a sticking point in negotiations. This could be because the parties cannot agree on the quantum or the profile of the risk, or the buyer simply won’t accept exposure to an identified issue. A tax insurance policy can cover specific tax exposures identified in buyer’s due diligence/ vendor due diligence which may be challenged by a tax authority in the future. Tax insurance may also cover not only tax risks identified within due diligence process, but also specific tax risks related to one-off transactions and restructurings (e.g., dividend, interest and royalties’ payments, sale of shares in Polish company, in-kind contributions, mergers, demergers or share for share deals).
Typically, the cover is granted for 60 to 84 months for tax risks.
The insurer and insured will agree
on the ‘retention’ (also known as
an excess), which is the uninsured
amount of the loss to be borne by
the insured.
The premium is a one-off cost payable after completion of the transaction and depends on the details surrounding the potential tax liability. Premium will range from 1.5% – 4%* in the CEE. In addition, an underwriting fee of approx. EUR 15,000 – 25,000 for underwriting work will be charged. Depending on jurisdiction there may be Insurance Premium Tax (IPT) payable. IPT in Poland is currently NIL.
Pricing terms and initial non-binding quotations can often be obtained within 48 – 72 hours and policies put in place within 10-14 days if necessary
Examples of tax issues that are coverable by a tax policy include*:
• VAT/CLAT reclassification (the risk that the sale of real estate is treated as a sale of an enterprise or organized as part of an enterprise rather than a
standalone asset);
• Withholding tax treatment of dividend, interest and royalties’ payments (substance, beneficial owner status);
• Polish capital gain tax on sale of shares in certain Polish companies (RE clause);
• Certain cases of free of charge benefits received;
• Self-employed contractors being treated as employees for tax purposes;
• Intangible services (CIT and VAT risk);
• Documentation on export and intracommunity supply of goods (VAT risk);
• Residency risk (PE/FE);
• Reclassification of loan into equity;
• GAAR risk;
• B+R relief;
• Tax efficient corporate reorganisations (upstream and downstream mergers, demergers, in-kind contributions, share for share deals);
• 50% tax deductible costs;
• Risks related to Special Economic Zone;
• Effective Management risks;
• PRS VAT risks.
*Subject to underwriting and case by case analysis
The Benefits of Tax Insurance:
• Eliminates potential transaction delay or non‑availability of advance rulings on identified tax matters;
• It helps manage the allocation of potential preclosing liabilities or if no clear guidance from the tax authority or legal precedent is available;
• Can enable a transaction to proceed which would otherwise falter;
• Can replace indemnities;
• Protects sellers proceeds against price reductions;
• Avoid lengthy escrow arrangements;
• Provides economic recourse to highly rated insurance institutions with excellent claims records;
• Complete solution as policy can cover tax liability, interest, penalties, defence costs and gross up;
• Some policies offer advance payment (up to policy limit) to cover a situation where a payment of tax is required in order to challenge a determination by the relevant tax authority;
• Offering a clean exit and the opportunity for sale proceeds to be distributed immediately on completion and removing the requirement for retention of sale proceeds