International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Assessing the insurability of substance risks

Sponsored by

BMS Group
Substance risks can be insured with careful diligence

In this interview, Adam Singer, of Certa Insurance Partners, talks to Dean Andrews, of BMS Group, about substance risks relating to cross-border interest and dividend payments.

Dean: There’s an increased global focus by tax authorities on the substance of the recipients of cross-border interest and dividend payments. Do you see a lot of enquiries in this area and what’s your view on the insurability of these risks?

Adam: We do see a lot of substance risk enquiries and have noticed a distinct increase in these enquiries following the ECJ rulings in the so-called ‘Danish Cases’ three years ago. 

Questions of substance are inherently subjective and fact-based and, as a result, no two risks are exactly alike. Substance risks can certainly be insured with careful diligence. Insurability ultimately depends on the particular fact pattern of the situation at hand.

Dean: What factors do you take into account when assessing the insurability of substance risks?

Adam: We need to have a good understanding of how the company operates. Why was the entity established in the jurisdiction?  Does its establishment there have a commercial rationale? Is there a wider investment platform in that jurisdiction? 

The identity and experience of the directors is very important. Are they the real decision-makers or are decisions being made elsewhere?  If so, where are these decisions made? 

There are other considerations relating to the set-up of the entity. Does the entity have its own offices and bank account?  What is the level of expenses incurred by the entity and the wider platform? Does the entity pay a meaningful amount of tax? What will it do with the proceeds – will these be reinvested or distributed to a parent? If proceeds are to be distributed, how soon will this take place?   

Dean: In which jurisdictions are you seeing substance risks?

Adam: The majority of the substance risks that we see are risks in Europe, particularly in relation to payments from Spain and Denmark, but we have also seen quite a number of enquiries relating to Asian jurisdictions.

Dean: Are some jurisdictions more insurable than others?

Adam: Certainly! In assessing insurability we are keen to understand the approach of the relevant tax authority.  Where a risk is in the EU, how a jurisdiction has interpreted the Danish Cases, for example, is key to our thinking.  

The Spanish tax authority, in particular, has been very aggressive recently, challenging many payments made from Spain to Luxembourg. We would need to be extremely comfortable with the fact pattern to insure a substance risk relating to a payment made from Spain.

Dean: How do you anticipate ATAD 3 or the ‘Unshell Directive’ will affect your appetite for substance risks?

Adam: In a number of ways the new directive may actually be quite helpful.  In setting a common definable threshold in the three tests for minimum substance, it may be that this becomes the pan-European benchmark for adequate substance.  

Also potentially helpful is the exemption in the directive for alternative investment funds. A possible effect of this exemption may be that it becomes acceptable that alternative investment funds are generally treated as having adequate substance by EU jurisdictions even if they do not meet the three tests. Although, as drafted, it does not appear that intermediate holding companies held by investment funds are exempted under this carveout.  

Dean: I see that the directive contains a reporting requirement if an entity fails any of the minimum substance tests. What effect would a requirement to report have on the insurance of a substance risk?

Adam: If an entity is required to report that it does not meet the tests then that may mean that insurance is more difficult. A failure to meet the minimum substance tests will likely mean an increase to the cost of insurance and, depending on the facts of the case, may mean that we would not be able to offer insurance.



Dean AndrewsHead of tax liability insurance, BMS GroupE:  

more across site & bottom lb ros

More from across our site

Premier League football clubs are accused of avoiding paying up to £470 million in UK tax, while Malta is poised to overhaul its unique corporate tax system.
Bartosz Doroszuk of MDDP offers insights on Poland’s new tax legislation on shifted profits, as the implementation deadline looms nearer.
Four tax specialists preview the UK’s transfer pricing requirements, which come into effect on April 1.
The rise of the QDMTT will likely change how countries compete on tax and transfer pricing policy, but it may not reverse decades of falling corporate tax rates.
ITR’s latest quarterly PDF is going live today, leading on the EU’s BEFIT initiative and wider tax reforms in the bloc.
COVID-19 and an overworked HMRC may have created the ‘perfect storm’ for reduced prosecutions, according to tax professionals.
Participants in the consultation on the UN secretary-general’s report into international tax cooperation are divided – some believe UN-led structures are the way forward, while others want to improve existing ones. Ralph Cunningham reports.
The German government unveils plans to implement pillar two, while EY is reportedly still divided over ‘Project Everest’.
With the M&A market booming, ITR has partnered with correspondents from firms around the globe to provide a guide to the deal structures being employed and tax authorities' responses.
Xing Hu, partner at Hui Ye Law Firm in Shanghai, looks at the implications of the US Uyghur Forced Labor Protection Act for TP comparability analysis of China.