Tax risks in ongoing business
Tax planning is basically planning in the face of uncertainty. Even the best tax planning does not prevent new tax risks from arising in existing structures as a result of legal changes or interpretations of the law. Tax audits can also lead to significant, unplanned drains on liquidity. Meanwhile, tax insurance has evolved and insurance cover can be sought even in case of tax risks under audit.
Example: Covering tax risks under audit
The majority of tax insurance policies are usually signed as part of the transaction or reorganisation, i.e. before the tax return for the relevant tax year is submitted, or a tax audit is even in sight.
If a tax audit starts, there are basically two scenarios in which tax insurance can be used: Firstly, to cover the tax risk of the company itself that is being audited, and secondly, to cover the tax risks in other companies of the same group that have not yet been audited, but have the same tax risk. The latter is particularly common in the area of asset and fund management, as investment funds are typically set up according to the “copy and paste” principle. In this respect, it may be necessary for the Alternative Asset Fund Manager (AIFM) or asset manager to take precautions against potential tax risks at an early stage, purely due to its legal obligation to represent the interests of investors.
However, legal uncertainties can also arise from planned or already completed legislative procedures and lead to tax risks, for which tax insurance can provide financial protection.
Typical practical cases: Legal uncertainties in relation to taxes for
- VAT risks from the change in the business model, which lead to a change in the input tax rate and thus the deductible input tax, e.g. in the area of insurance brokerage or from the portfolio management of funds in accordance with the Asset Investment Act or KAGB
- the holding period for the participation in a company holding real estate after the introduction of the MoPeG (change in the law as of 2024)
- the introduction of the new regulation of share deals occurring between the signing and closing of a property transaction (legislative amendment in 2019)
