Before considering insuring a PN7 risk, insurers will require a “should level” opinion from a reputable law or advisory firm supporting the technical soundness of the position. Such advice should detail:
1. the substantive tax-technical analysis;
2. financial exposure; and
3. likelihood of the CTA’s success in challenging the PN7 position before the tax court.6
Until recently, insurers were not keen to insure Chinese tax risks, but there are now insurers in the market that underwrite PN7 risks falling within specific parameters. Amongst other things, it is required that:
(i) The interposition of the Offshore Company has a commercial rationale as opposed to a pure tax planning structure.
(ii) The determination of the equity value and income derived from the Chinese Taxable Assets is not (too) arbitrary.
(iii) There is economic substance outside China, including key management.
Accordingly, multinational groups or investment funds acquiring or exiting non-Chinese target companies with exposure to China may find insurance for PN7 risks particularly interesting.