What is Tax Indemnity Insurance?

When tax indemnity insurance is commonly considered

Tax indemnity insurance is typically discussed in connection with transactions or arrangements where historic tax positions may be uncertain. This can include mergers and acquisitions, corporate reorganisations, property transactions or other situations where potential tax exposures exist but have not yet crystallised.

It may be relevant to businesses, investors or individuals involved in complex transactions, particularly where contractual tax indemnities alone are not considered sufficient or practical.

How tax indemnity insurance generally operates

Tax indemnity insurance policies are usually arranged to cover defined tax risks identified during due diligence or advisory processes. If a tax authority later raises a claim relating to the insured risk, the policy may respond in accordance with its wording.

Policies are typically time-limited and aligned with the applicable statutory period during which a tax authority can raise an assessment, subject to policy conditions.

What tax indemnity insurance is typically intended to cover

Subject to the policy wording, tax indemnity insurance is generally intended to address financial losses arising from specific tax exposures. This may include:

• Undisclosed or historic tax liabilities
• Tax assessments or challenges raised by authorities
• Certain penalties, interest or associated costs
• Tax risks linked to corporate reorganisations or transactions
• Cross-border tax exposures where applicable

Cover is limited to the risks specifically insured and does not apply to all tax liabilities.

Common exclusions and limitations

Tax indemnity insurance policies include exclusions and limitations, which may vary between insurers. Common exclusions can include:

• Known or disclosed tax risks at the time the policy is arranged
• Fraud, dishonesty or deliberate wrongdoing
• Changes in tax law after the policy is incepted
• Tax liabilities arising outside the insured period

The scope of cover depends on the policy wording and the information disclosed to the insurer.

How tax indemnity insurance differs from general business insurance

General business insurance typically covers risks such as property damage, liability or interruption to operations. Tax indemnity insurance is specifically concerned with financial losses arising from tax-related claims or assessments.

It is usually arranged as a standalone policy tailored to a specific risk or transaction rather than as part of a standard commercial insurance programme.

Duration and policy structure considerations

The duration of a tax indemnity insurance policy is commonly linked to the relevant statutory limitation period for the tax risk being insured. This may vary depending on jurisdiction and the nature of the tax exposure.

Policies are usually structured to cover a defined risk for a fixed period rather than ongoing or future tax liabilities.

Understanding how tax indemnity insurance is used

Tax indemnity insurance is often considered as part of a broader risk management or transactional framework. Its relevance depends on the specific tax exposure, transaction structure and risk appetite of the parties involved.

Whether it is appropriate in a particular situation depends on individual circumstances and the terms of the policy.

This information is provided for general guidance only and does not constitute insurance advice. Insurance requirements vary depending on individual circumstances, policy terms and insurer conditions.

Frequently Asked Questions

Is tax indemnity insurance the same as general business insurance?

No. Tax indemnity insurance is designed to address specific tax-related risks, whereas general business insurance covers a wider range of operational and liability risks.

Does tax indemnity insurance cover all tax liabilities?

No. Policies apply only to defined tax risks that are specifically insured. Known risks, future tax liabilities and excluded scenarios are not covered.

Is tax indemnity insurance only used in mergers and acquisitions?

While commonly associated with M&A, tax indemnity insurance can also be relevant in other transactions, restructurings or situations involving historic tax uncertainty.

How long does tax indemnity insurance last?

Policy duration is usually aligned with the statutory period during which a tax authority can raise a claim, subject to the policy terms.

Can tax indemnity insurance be customised?

Yes. Policies are typically tailored to the specific tax risk, transaction or jurisdiction involved.

Who typically pays for tax indemnity insurance?

Responsibility for the premium depends on the transaction structure and commercial agreement between the parties involved.