What is tax insurance?
Securing costs and liquidity
Tax insurance provides protection against unplanned tax payments that may arise as a result of legal uncertainties in relation to the origin, amount or timing of a tax. The insured tax risks are usually identified or known risks, but unknown tax risks can also be insured.
Tax risks have two particular pitfalls: tax payments can be very high, and the proceedings to enforce them lengthy and expensive. To ensure the continued existence of the business – even in times of rising interest rates and falling income – and to enforce its rights against the tax authorities, the liquidity risk can be covered by tax insurance. This is because most insurance companies make advance payments in the event of a tax assessment, and initially pay the disputed tax to the tax office – so that you can assert your rights in the proceedings with the tax authorities or at court, and at the same time, have financial security in the amount of the insured costs.
In principle, all types of tax risks can be insured under a tax insurance policy: be it future, current or historical risks, risks from transactions or those without a transaction background.
Tax risks arising from abusive tax arrangements, changes in the law (with exceptions) or factual risks (e.g. missing documentation), however, are not insurable.
Tax insurance is used primarily by companies or investment funds to protect buyers, sellers or target companies against tax risks. Tax insurance is available for private individuals under certain conditions, usually in connection with their business activities, e.g. in the context of asset succession or the termination of a business.
Depending on your security needs and liquidity requirements, the policy limit under a tax insurance can be tailored to your individual requirements: this can include the amount of the pure tax risk, but also a buffer for possible interest or surcharges on the tax, litigation and consulting costs (“defence costs”) up to the so-called gross up, i.e. the tax payable on the payout of the insurance sum by a taxable policyholder.
Tax risks have two particular pitfalls: tax payments can be very high, and the proceedings to enforce them lengthy and expensive.
How does tax risk insurance work?
Speed is key - cost-free quotes and high cost transparency
To obtain non-binding quotes for insuring your tax risk, please contact us directly, via telephone, e-Mail, our website or in person.
After an initial assessment of insurability, we will request non-binding quotes from the insurance market for you. This does not involve any costs for you and quotes are usually available within a few days.
If you decide in favour of one of the offers, i.e. you select the best offer from an insurer, then the so-called “underwriting process” begins, in which the insurer carries out an assessment of the tax risk and simultaneously drafts the insurance policy. When beginning the underwriting, the costs indicated in the insurer’s offer will be triggered for review (“underwriting fee”). Depending on the complexity of the tax risk and the need for clarification, several versions of a policy may have to be circulated and negotiated. The tax insurance comes into force upon signature by the policyholder and insurer, as well as payment of the insurance premium on the due date.
The period from initial enquiry to the policy inception is typically between seven to fourteen days.
Ideally, you should already have a description and assessment of the tax risk from your tax advisor available for the initial enquiry. If necessary, further documents on the facts of the case (e.g. draft contracts) can be included. A final written statement from your tax advisor should then be submitted – at the latest before the policy negotiations are finalised. During the underwriting process, the insurer may also request further documents or information, or ask questions about the facts of the case and the tax risk.
We will, of course, be happy to discuss your tax risk with you, even if you have not yet received any tax opinions or cost approvals. Depending on the type of tax risk, we may be able to give an initial indication of insurability or agree the most suitable approach for your situation.
In principle, the duration of the procedure depends on your specifications and is essentially controlled by you. Both the insurance companies and we, as brokers, are fully prepared for this. The duration is affected by the quality of the available documents and the co-operation of all parties involved. It usually takes five to ten days from the time quotations are obtained until a tax policy comes into force. In some cases, however, the process can be faster or slower.
Tax insurance is offered both directly by individual specialised insurance companies and – for the most part – via so-called “Managing General Agents” (“MGAs”). MGAs are companies that specialise in auditing tax risks and underwrite tax policies for the account of their risk capital providers. The risk capital providers are renowned insurance companies and syndicates that do not have the capacity to place tax policies themselves, but merely participate in the capital of a tax insurance policy placed by an MGA. These participations will be disclosed in the offer document.
The cost of tax insurance depends on various factors, in particular the type and amount of the tax risk and its complexity, the risk assessment by the advisor and the quality of his advice, the time when the policy comes into force and the insurer’s risk appetite: on average, premiums range from around 2% to around 5%; if the insurance market is highly competitive, they can also be less than 2%. We support you in obtaining the best offer for your tax risk by presenting your risk in such a way that you receive as many competitive offers as possible. For higher risks, it may be possible to reduce premiums by paying higher retentions.
Unlike most losses arising from legal relationships, a loss from an insured tax risk only occurs once the tax has been finally and irrevocably assessed. This assessment may be preceded by several years of proceedings with the tax authorities or the tax courts. In this respect, tax policies differentiate between the final tax loss, i.e. the payment of the tax, and the event that can lead to the tax risk being taken up (“claim”), such as the announcement of a tax audit. If a “claim” arises, this must be reported by the policyholder within the term agreed under the policy, but latest before the end of the usually seven-year term of the policy. Timely notification of a potential loss during the term of the policy is sufficient, even if the final tax loss will be determined a considerable time after the policy expires in a court decision. As the insurer usually pays the assessed tax first, it has contractually stipulated in the policy its rights to be involved and to co-operate in the proceedings against the tax assessment notice, while there are specified conduct rules for the policyholder to comply with under the tax policy.
Tax Insurance at a glance
Policy limit
Tax risk and optionally: interest and potential penalties, legal and consulting costs (“defense costs”) and so-called “gross-up” (tax on the payment of the sum insured)
Term
Generally seven years, in individual cases ten years
Retention
Depending on the risk level and premium amount, a retention may be advisable or necessary (often only as a direct contribution to the legal and consulting costs)
Premium
Approx. 2% – 5% of the policy limit for low risks
Notification duties
The policyholder must comply with the notification obligations agreed in the policy, i.e. notify all events that may result in a claim.
Participation rights
In principle, the insurer has certain rights of information, control and approval if the insured tax risk is taken up.
Exclusions
Changes in law; fraud, misrepresentation and false declarations by the policyholder; abusive of tax laws
