Tax risks on divestment / liquidation
Fast exit - quick and risk-reduced exit from investments and liquidation
“Fast exit” or “clean exit” as the objective of divestments or liquidations: in reality, fast cash-outs are often opposed by legal deadlines and lengthy tax procedures, either of which can lead to reduced payments to the investor due to retention of funds, or the need for additional capital injections. Good navigation skills are required by the management to balance the investor’s interests and applicable legal requirements. So-called “wrap-up” policies, issued by a limited number of specialised insurance companies, can efficiently cover both tax risks and certain legal risks in a bespoke policy.
Example: hedging tax risks after the winding up of investments/investment funds
The winding up of investments or investment fund structures in which various companies are held can take years after the decision has been made. And it does not end before completion of the final tax audit. If unplanned tax payments may still result under an audit, the management will typically make precautionary deductions from the sales or liquidation proceeds paid to the shareholders or investors or – if permissible – request further capital injections from them. All costs for maintaining the structure, e.g. for accounting, tax advice and, if applicable, auditing, will persist until the final liquidation. In addition to known and unknown tax risks and their consequential costs, certain legal risks can also be insured against in tax insurance policies or special insurance policies as required, e.g. from ongoing warranties or tenancy agreements.
Typical practical cases:
legal uncertainties in relation to taxes triggered upon liquidation of investment funds owning real assets, especially in the real estate sector, e.g. real estate transfer tax or trade tax.
