March 16th, 2022

Private Equity, M&A and Tax

M&A Tax Risks: Why Dealmakers Should Consider Tax Insurance

By: Martijn de Lange


In M&A transaction negotiations, parties often struggle to allocate and account for identified tax risks. Tax insurance can help bridge the gap by enabling a transfer of such risks from deal parties to the insurance market at a fixed cost. In this article, BMS’s tax insurance broker Martijn de Lange explains why dealmakers should consider using tax insurance in M&A transactions.

What is tax insurance?

Tax insurance eliminates a taxpayer’s financial exposure as it arises from a successful challenge by a tax authority to the expected tax treatment of a proposed, current or historic transaction. Under a tax insurance policy, the insured (the taxpayer) transfers an identified tax risk to an insurer at a fixed cost.

The key features of a tax insurance policy are as follows:

  • Cover: To the extent that the tax authority successfully challenges the insured tax position, the policy covers the resulting tax that becomes due. In addition, the policy can cover associated interest, non-criminal penalties, defence costs and tax gross-up.
  • Limit: The total amount of cover (“limit”) depends on the risk and can be as low as USD 2m and as high as USD 1bn. The limit can cover the entire financial exposure or a part of it, with the insured retaining the risk for the remainder.
  • Premium: The one-time-only premium is a percentage of the limit and generally ranges between 2% and 6%.
  • Period: Standard policy period is seven years; however, longer or shorter periods are possible.

Which M&A tax risks are insurable?

Deal parties can use tax insurance to insure risks arising from the M&A transaction itself or risks identified while conducting tax due diligence on the target company or assets (Target).

Insurers will underwrite tax risks with a low/medium probability of materialising originating from a transaction for which the application of tax rules is unclear. There must be a sound legal basis for the tax position being taken and tax insurance cannot be obtained for an incorrect tax position.

Below are five questions that help determine whether a tax risk is insurable. If all five questions are answered affirmative, tax insurance should be available:

1.Does the risk have a low/medium probability of materialising?
2.Does the risk relate to a 'grey area' in interpreting or applying tax rules?
3.Is there a sound legal basis for the tax position, and is it not purely a detection risk?
4.Is a reputable tax advisor/lawyer willing to render a detailed opinion addressing 1, 2 and 3?
5.Is there a strict rule of law system in place in the jurisdiction(s) involved?

The following are just a few examples of M&A tax risks that are often insured:

Indirect share transfers

Capital Gains Tax

Capital vs. revenue

Real Property Transfer Tax

But why should dealmakers consider using tax insurance in an M&A transaction? We’ll explain four key reasons below:

1. Shortfalls of existing options

In current M&A practice, there are several options to deal with identified tax risks. However, these options often come with their shortfalls:

  • Specific indemnity: One option is for deal parties to self-insure, and it is common for sellers to indemnify buyers for specific tax risks by way of a specific indemnity. If the risk materialises post-completion, the seller will be required to compensate the buyer for resulting financial losses up to an agreed amount. However, this option conflicts with most sellers’ objective of securing a clean exit post-completion.
  • Escrows/holdback: Escrows or holdbacks are often negotiated in tandem with a specific indemnity, with a portion of the purchase price being withheld by the buyer or a third party. While this option is frequently used in M&A transactions, it entails an inefficient use of capital. Further, the duration of the holdback/escrow normally corresponds with applicable statutes of limitation which extend to 10 years or longer. Setting up an escrow arrangement is time-consuming and costly too.
  • Tax Ruling: In certain jurisdictions, taxpayers can obtain certainty on the tax treatment of a transaction through an agreement with the tax authority. While such “tax ruling” offers a high degree of certainty, some significant downsides exist. First, there is no control over the outcome of the process, and a taxpayer may end up with an unfavourable tax ruling. Further, a taxpayer must disclose much information when negotiating a tax ruling, which is not always desirable. Third, the process is often time-consuming and expensive.

Because of these shortfalls, deal parties are increasingly pivoting towards tax insurance to mitigate against M&A tax risks. Tax insurance is a cost-efficient, quick and confidential solution to transfer tax risks from taxpayers to the insurance market, as explained in more detail below.

2. It can help to get the deal over the line

Buyers and sellers often struggle to allocate and account for identified tax risks when negotiating the Target sale. This can be caused by conflicting views on the risk and different risk appetites, for instance. In case identified tax risks present significant financial exposures, a misalignment may cause parties to pull the plug on the transaction altogether. This is where tax insurance can add tremendous value, as illustrated in the below example:

Example 1

Alpha Capital (Seller), a private equity fund tax resident in Country A, intends to sell 100% of its shares in a Beta Corp (Company), a portfolio company tax resident in Country B, to Gamma Inc. (Buyer), an MNC. The transaction value is USD 500m and Seller expects to derive a gain of USD 100m from the sale.

Per external tax advice, Seller intends to claim an exemption for capital gain tax (CGT) in Country B by virtue of the application of the tax treaty between Country A and Country B. However, there is a (low) risk that Country B's tax authorities challenge Seller’s tax position and disallow the exemption. In case they are successful, the tax bill is ~USD 20m, and Country B's tax authorities would collect this amount from the Company or the Buyer.

Seller and Buyer disagree on the allocation of said risk. Seller argues that the risk is low and is unwilling to indemnify the Buyer for any losses. Buyer refuses to take on the risk of paying USD 20m. As a result, the discussion prolongs, and the deal is at risk.

To solve the issue, parties decide to procure a tax insurance policy with a limit of USD 20m. BMS assists and recommends Insurer Delta following a comprehensive review of the pricing, coverage, and claims track record, among other things. With the CGT risk off the negotiation table, parties continue to seal the deal.

3. A solvable and reputable counterparty in case of claims

Except for dispute lawyers, no one likes legal battles.

In case the seller has indemnified the buyer for a tax risk, and this risk materialises, the buyer will have to claim against the seller to recover financial losses. It is often not ideal for buyers and sellers to deal with such claims. For instance, Target's management is acting as seller and retaining an interest in Target's business after the deal. Other than that, it is highly unlikely that a seller will have the required expertise and experience dealing with claims, making the claims process less efficient.

With a tax insurance policy in place, buyers and sellers avoid participating in drawn-out legal battles. Instead, they claim under the tax insurance policy in case of (covered) losses. Reputable and well-established insurers are backing such policies, with solid track records of dealing with claims fairly, collaboratively and transparently. This compares favourably to one-off interactions with sellers.

4. It can be put in place within a short period at a reasonable cost

The premium for a tax insurance policy is a percentage of the limit of insured bought. The limit includes tax, defence costs and, if applicable, interest, (non-criminal) penalties and a gross-up for taxes due on the payment. Premium pricing primarily depends on the nature of the risk, the strength of the tax position, the jurisdiction(s) involved and the amount of the financial exposure.

In Asia-Pacific, premiums range between 2% and 6% of the limit.* However, the general trend is downwards, driven by increased capacity and competition from insurance markets in Asia and London.

Example 1 (continued)

Let’s assume that the premium for the tax insurance policy is 2% for a limit of USD 20m. In that case, the one-time all-in cost for a policy with seven-year cover would come at USD 400k. Amortised over the seven years of coverage, this means that deal parties can eliminate a tax exposure of USD 20m with annualised costs of just ~USD 57k.

A common misconception about tax insurance is that it takes much time to procure. In reality, tax insurers work on tight deadlines to ensure their involvement does not adversely impact the transaction timetable. Deal parties can obtain a tax insurance policy within two to three weeks and the various stages of the process are outlined below:

*The premium will include BMS's brokerage commission, and no separate fees will be payable to BMS.

What do we need from you to get started?

For BMS to approach insurers and provide a sense of pricing and coverage for an identified tax risk, we would need to receive the following information:

  1. Description of the tax risk
  2. Copy of (external) tax advice/opinion
  3. Calculation of the financial exposure
  4. Summary of the M&A transaction

The BMS team will guide you on the information and documents required.

De Lange Martijn

Martijn de Lange

Managing Director

T: +852 3579 5486
M: +852 9772 9951
More Info / Email Me

Andrews Dean

Dean Andrews

Head of Tax and Restructuring Liability Insurance

T: +44 (0)20 7480 0308
M: +44 (0)7876 815 643
More Info / Email Me


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