On 2 December 2016, we published an eAlert on the use of Warranty & Indemnity (W&I) insurance. Here we address a few tax aspects purchasers should consider when seeking coverage for tax under W&I insurance.
In the W&I market, it is common to come across exclusions in W&I insurance relating to certain tax matters. These exclusions mainly relate to secondary tax liability and transfer pricing. Purchasers should be aware of these typical exclusions when agreeing to W&I insurance, as it may limit recourse for tax claims under the SPA.
In the Netherlands, we recognize various secondary tax liabilities, however the most commonly seen is the joint and several liability of a company that belongs to a fiscal unity. Such liability may be for: corporate income tax/value added tax purposes; unpaid tax corporate income tax; or value added tax liabilities of the fiscal unity. A fiscal unity is usually created for tax efficiency purposes, to facilitate the ability to directly offset losses with profits of companies belonging to the fiscal unity. The benefit is that transactions between companies belonging to the fiscal unity are typically ignored for tax purposes. On a regular basis we notice that the acquisition of a company results in a termination of the fiscal unity, resulting in a loss of the joint and several liability of a company and corresponding tax benefits. When this happens, the company can be liable for the secondary tax liability and unpaid wage taxes of independent contractors, subcontractors or employment agencies.
In our experience, there are opportunities to increase the appetite of a W&I insurer to provide some level of coverage regarding secondary tax liabilities under the W&I insurance depending on the specific circumstances. We believe that is possible to make an adequate assessment as to the risk when insuring secondary tax liability in the Netherlands relating to a fiscal unity. In this respect, the level of solvency of the parent company of the fiscal unity is relevant as well as the current status of the filings and payments by the fiscal unity. The W&I insurer may then consider the risk to provide cover for such secondary tax liability as remote and may be willing to provide some level of cover subject to commercial terms.