Tax Liability Insurance (TLI)
Tax liability insurance enables a taxpayer to either reduce or eliminate a potential financial loss relating to the tax treatment of a transaction, investment, or other activity where the legal accounting conclusions that supported such a tax treatment could be challenged by the relevant tax authority.
The policy is tailored to address the specific financial exposure of the insured should there be an unfavorable ruling: the primary amount of tax payable, any interest and insurable fines and penalties due, defense costs including the expenses involved in engaging legal or tax specialists, and gross-up amounts for taxes due on receipt of insurance proceeds.
Coverage is available for a wide range of tax risks and can be used for M&A activities or in other contexts:
M&A context:
- In preparation for a sale, a seller can address a known tax issue to ensure a smoother and more expeditious sale process
- A buyer can differentiate its bid and be more competitive in an auction situation by using TLI to resolve a known tax issue
- TLI can ring-fence an issue where the seller and buyer are unable to obtain a determination on a tax issue from tax authorities prior to the transaction’s close
- TLI can cover a tax issue that is excluded by warranty & indemnity insurance (W&I)
Other context:
- Tax risk management where a tax position can be challenged by a tax authority
- Gaining certainty for the tax treatment of an entity (REIT, S corporation, partnership, etc.)
- An issue identified in a live tax audit
- Cross border and international tax issues
Benefits
Tax laws are complex and, with such complexity, come uncertainties. An unexpected challenge to a tax structure can significantly impact the value of a company and/or the success of an M&A transaction. Tax liability insurance can be an effective risk transfer tool to protect those that are insured where there is an element of uncertainty regarding the tax treatment relating to a change in ownership of a company, reorganizations, or the historic tax positions taken by a company or its consolidated tax group.
Tax Insurance in South Korea
Interest in tax insurance has grown steadily over the last few years as tax authorities in the Republic of Korea (ROK) have become more aggressive to improve tax revenue, and M&A transactions, past and present, are an area of focus. Asia Risk and Insurance Advisors continues to see new and creative applications of tax liability insurance to address a range of tax concerns and has advised on several successful tax policies that mitigate concerns regarding capital gains tax applicability and the identification of beneficial owners. GP-led secondary transactions can also create unique tax issues that TLI can be structured to ringfence.
Cross-border deals are a growing area of concern for buyers as tax authorities scrutinize corporations’ tax arrangements especially for those with multi-country operations. On distressed deals, tax insurance can protect the debtor and/or buyer from unexpected tax liabilities relating to a debt restructuring, cancellation of debt income, ability to use a target company’s NOLs, etc.
Tax Liability Insurance FAQs
1. When does tax liability insurance make the most sense for M&A deals in South Korea?
Tax liability insurance is most effective in Korea when an M&A transaction involves a clearly identifiable tax issue that could impact deal value or timing—such as restructuring steps, use of net operating losses, or complex withholding and capital‑gains treatment. ARIA focuses on these “deal‑critical” risks and helps clients decide which exposures can be efficiently transferred to insurers and which are better addressed through structuring or negotiation.
2. What kinds of Korean tax issues can be ring‑fenced with tax liability insurance?
Korean tax liability insurance can ring‑fence issues such as eligibility for tax‑neutral reorganizations, application of participation exemptions, availability and use of historic losses, transfer pricing issues, and character of income for withholding or capital‑gains purposes. ARIA helps clients identify which of these issues are insurable, quantify the potential exposure, develop policy language so coverage dovetails with SPA protections, and manage your insurance broker to achieve the most effective results.
3. Can tax liability insurance be used for tax risks in other Asian jurisdictions?
Yes. Many policies ARIA works on involve Asian tax authorities beyond Korea, including Japan, India, Southeast Asia, and other APAC markets. We help clients package single‑country or multi‑country tax exposures so they can be underwritten by specialist insurers, reducing the need to price worst‑case tax outcomes directly into transactions or restructurings.
4. How does ARIA help buyers and sellers use tax liability insurance alongside W&I insurance?
In Asia, tax liability insurance often sits next to warranty & indemnity (W&I). ARIA advises on how to carve out specific tax issues from general warranties, structure standalone tax policies for known or contested items, and integrate limits and retentions so that the tax policy supports, rather than conflicts with, existing M&A coverage.
6. Is tax liability insurance only for large deals or can mid‑market Asian transactions benefit?
Mid‑market deals in Asia can benefit just as much as large M&A transactions, especially where a single tax issue represents a disproportionate risk to value or closing certainty. ARIA routinely helps mid‑sized corporates and financial sponsors use tax liability insurance to unlock deals that might otherwise stall due to tax uncertainty.