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Tax liability insurance

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THE PRODUCT
Transactional liability tax insurance helps to facilitate Mergers and Acquisitions by transferring tax related risks to the insurance market.

It can be brought prior to, at the time of or after deal completion. Even known tax issues have the potential to be covered.

It provides a range of advantages, such as removing buy-side concerns over the ability of the seller to afford retrospective taxes following a potential breach of tax covenant/warranties as well as allowing for the sell-side to release funds generated from the sale without the need for an escrow.

Situations where this product will be useful

I. Fund liquidation
A private equity firm is liquidating a fund and wishes to return money to investors as soon as possible. There are a number of contingent tax liabilities from past exists which prevent the closure of the fund. The fund purchases an insurance policy which covers these liabilities, enabling the fund to return cash to investors immediately.

II. Deal deadlock
A private equity fund wishes to exit an investment, however the buyer, having identified a particular tax issue, demands a greater coverage of tax warranties that the seller is willing to give. After discussion, the buyer purchased a tax warranty & indemnity policy to protect against the risk of tax authorities acting upon the issue in question. This in turn enabled the private equity fund to provide the deed/warranty.

III. Bridging legal opinion disputes
Following due diligence procedures, lawyers representing the buyer highlight a potential tax issue. The seller’s lawyers disagree and feel there is no risk attached. A situation of deadlock is likely to ensue, with buyers demanding a higher warranty cap whilst the seller is unwilling as doing so. Insurance provides a solution to both parties.

IV. Management Buyout
Management running a target company are required to sign a tax covenant and warranties. It is likely that they will own a minority stake in the business. Management will be unlikely to expose themselves to potential liabilities in the covenant/warranties greater than their ownership. Transactional liability insurance can be bought to ‘top up’ the cover and negate risks of tax issues arising post deal completion.

For Further Information Contact:

Gajanan Rudra

AVP Private Equity

Telephone

+91-22-6655 8824

Email

gajanan.rudra@howdenindia.com