Tax risks in transactions
Eliminating tax as a deal breaker
Driving in fog can end at the nearest tree. Good planning and due diligence are therefore essential, as is the appropriate safety equipment.
In M&A transactions of all types and in all sectors, contracting parties increasingly use insurance solutions to quickly and efficiently eliminate deal breakers of any type. But even in anticipation of transactions, tax risks can be outsourced to tax insurers to prevent price reductions and facilitate swift negotiations.
Example: hedging transaction-related tax risks
In transactions with third parties, a variety of tax risks can arise from the transfer of assets or company shares, as well as changes to the structure – before or after the acquisition. Some of these can be insured in so-called “Warranties and Indemnities” (“W&I”) insurance policies, others in tax insurance policies. The main difference is that, generally, W&I insurance only covers unknown tax risks, i.e. those not included in the tax due diligence audit. In individual cases, known tax risks can also be covered under the W&I insurance (so-called “affirmative cover”). It should be noted that the conditions regarding the scope of insurance and benefits differ significantly from those of tax insurance. In this respect, tax insurance can be a useful supplement to W&I insurance, especially where the amount of known tax risks is high.
Typical practical cases: Legal uncertainties in relation to taxes for
- Termination of tax groups due to the cancellation of profit transfer agreements or the sale of the controlling company or the controlled company with corresponding liability positions
- The transfer of directly held real estate, e.g. the existence of commercial property trading,
- Secondary liability for tax debts of the previous owner,
- Real estate transfer tax due to so-called “uniform contract” (“einheitliches Vertragswerk”) in case of project developments
- Transfer of indirectly held real estate, e.g. real estate transfer tax on the transfer of shares in companies holding real estate,
- Creation of a German trade tax liability for a foreign company owning German real estate
- Taxation of profits from the termination in the event of a gradual sale
