On M&A transactions a common requirement is the provision of specific tax liability insurance for the risk that a non-UK incorporated Target entity could be deemed to have been tax resident in the UK.
Buyers are frequently unwilling to assume the risk of tax residence being found to be the UK on the basis the tax liability is likely to be very large and would be created by the acts of the seller. Sellers often believe the risk of tax residence is low but the buyer and its advisers often form a different view or are simply unwilling to take the risk of inheriting an entity which is in fact a UK taxpayer rather than an offshore vehicle. The insurance policy can remove this potentially contentious issue from the transaction and provides certainty on this point.
As a policy issued to a buyer also covers the seller’s dishonesty/fraud, this provides great comfort to a buyer who has completed a thorough tax due diligence but wants to ensure they do not inherit a significant tax liability in the future. We work with the accountants and lawyers on the transaction to be able to analyse and understand the residence risk. The tax policy would cover the corporation tax liability due to Her Majesty’s Revenue & Customs, interest, penalties and defence costs of dealing with a tax authority challenge.