Whenever corporate groups embark on restructuring plans, one of the most important issues to consider is tax related. Whether the restructuring entails the transfer or liquidation of group companies, a restructuring of group debt, or pre/post deal restructuring, there are usually tax risks to be mitigated. The purpose of this tax bulletin is to provide practical guidance on how tax insurance can effectively be used to mitigate tax risks arising from group restructurings.
Tax insurance in lieu of tax clearances
Sometimes the tax law and/or its application to a particular set of steps in a restructuring plan may be uncertain. In such cases, it is often recommended that a tax clearance or ruling is obtained from the relevant tax authorities in order to confirm the tax position.
However, obtaining a tax clearance may have significant draw backs. Firstly, such clearance can often take a long time, which is not practical in the case of timing pressures. Secondly, tax authorities would often require that the entire restructuring plan be submitted for scrutiny before issuing a tax clearance.
This may not be desirable for a variety of reasons.
Considering the above, the use of tax insurance in lieu of a tax clearance is proving increasingly popular. The tax insurance process is relatively quick, and there is generally no requirement to make any disclosure to the tax authorities. It should however be noted that a tax risk which has already entered the tax clearance process is typically not insurable, unless the clearance request can be withdrawn without raising unnecessary concerns. Therefore, it is important to make a decision in advance to either follow the insurance or clearance route.
Insuring valuation risks
A certain tax treatment may be dependent on a particular valuation of a company or underlying assets, for example. In this case there is usually no uncertainty relating to the interpretation of the tax law, but the risk relates to an incorrect valuation, which may result in additional tax charges.
The good news is that it is increasingly possible to insure the valuation risk, i.e. the correctness of a certain valuation, in a tax context. However, in order to do so, an insurer would typically require a third party valuation to be done, which may take some time.
The tax consequences of a particular restructuring plan are often subject to a proper implementation of the restructuring plan. In this regard, those restructuring steps that have already been implemented should be distinguished from those which still require implementation.
Where restructuring steps have been implemented, insurers should be willing to review the underlying implementation documents and confirm the expected tax treatment with insurance cover. However, what an insurer is unlikely to do is to insure that the steps would be properly implemented in future, the so-called implementation risk.
Blanket tax insurance cover for restructuring
Tax advisors may often be confident that there should not be any tax risks attached to a particular restructuring plan they developed, negating the need for tax rulings or tax insurance. However, what if they are wrong?
The question then arises whether a tax restructuring plan can be insured as a whole to provide cover for any “unknown” tax risks arising as a result of restructuring. The short answer is yes, in principle it is possible. As part of the underwriting process, the insurer would have to review the underlying implementation documents in order to confirm the view that there should not be any tax risks attached to the restructuring. This implies that blanket insurance for a restructuring plan, which has not been implemented yet is not possible – neither would there be any value in it, as tax risks could only materialise on implementation.
Tax insurance is increasingly used in order to facilitate restructurings by moving any related tax risks from the corporate group to the insurer, whether in the context of a M&A deal or not. As such, tax insurance can be a quick and effective solution to tax uncertainties arising in the context of restructurings, providing piece of mind to corporate management and other relevant parties.
For further information, please contact, Leon Steenkamp, Head of Tax Insurance on +44 (0)20 7558 3994 or email firstname.lastname@example.org.