Dean: How has tax liability insurance been penetrating the French market over the last five years?
Emmanuelle: Probably as a result of their Latin culture, French actors have been slow to enter the warranty and indemnity (W&I) market and, similarly, late at integrating tax liability insurance (TLI) to settle French transactions.
But thanks to a very specific French 3% tax risk, that often proves difficult to be settled in French real estate transactions, the cultural dam was finally broken a few years ago. Since then, TLI has grown in popularity and is now an essential tool to facilitate and secure transactions in France.
Dean: That certainly coincides with our experience. What has been interesting from an insurance perspective is the dramatic increase in French underwriters that have been hired to service this demand, something which should further increase capacity and broaden appetite to insure French tax risks. What do you think makes the use of TLI well suited to the French market?
Emmanuelle: The French market seems tailored made for TLI.
First, because of the tax ambiguity in France due to the reluctance of the French Tax Administration (FTA) to publish practical official positions on various sensitive topics or to answer certain requests for clarification. There is no culture of cooperation between the FTA and the taxpayers. This weakness is well identified by the current government which tried to improve the relationship via the so called "law for a State at the service of a trustworthy society" enacted in 2018. But despite the words, this new regulation has not yet been capable of effectively changing the day-to-day management of tax matters.
Second, because of the time that the FTA might take to answer a request for a ruling. Although by virtue of law, the FTA has an obligation to answer within a certain timeframe, absent any sanction, it is very common that a ruling falls by the wayside. Not only when the topics are complex. Also when it relates to common and standard operations for which the taxpayer is seeking some comfort, or has conducted a strong legal analysis.
Third, because of the magnitude of certain French tax penalties that may apply for simple failure to comply with pure reporting formalities in due time and where late filing remains at risk due to very strict conditions provided for a spontaneous regularisation.
Those specificities of the French tax market may result in high quantum risks and strong uncertainties even when valid arguments exist against them. TLI can facilitate transactions by remedying these situations in an efficient and quick manner by transferring the risk to the insurance market.
Dean: What French tax risks do you often see insured in France?
Emmanuelle: We see a wide range of tax risks in France for which the parties are now seeking TLI.
Starting with failure to comply with reporting formalities, TLI may secure the lack of IFU forms (reporting dividends or interest payments), or DAS2 forms (reporting fees or commissions payments), or 54 septies forms (reporting latent capital gain). It can also cover omission or mismatch of figures in those filings. Those failures did not per se result in any tax losses for the FTA but the fines correspond to 50% of the amounts omitted and the possibilities to regularise are strict. In practice, reassessment on this ground remains very unusual. But the risk is systematically highlighted in tax due diligence and may trigger discussion on an escrow deposit to secure the risk in share deals.
Real estate transactions also remain a major source of business. Apart from the French 3% tax on real estate assets, we note an appetite to secure the application of the VAT suspension regime provided for transfer of ongoing concerns (TOGC) to real estate asset deal. The question is whether the sale of a property qualifies as a TOGC and benefits from the VAT suspension regime in a context where the conditions have been enlarged. Applying VAT by error may in fine remain more costly than being reassessed. Seeking a TLI may therefore be useful in certain circumstances.
Dean: What other French tax risks do you think could be insured in the future or that you see developing?
Emmanuelle: We note a new strength of TLI requests to cover more risky situations.
We are aware that TLI has been used to secure the benefit of a tax treaty provision with foreign holding companies where the assessment of substance and effective beneficiary is a question of facts.
If TLI starts covering more challengeable and risky situations, there could be a new business with management packages in a context of increased uncertainty given the importance of the tax treatment of managers remuneration and participation for incentivisation purposes.
Moreover, as the FTA is sometimes convinced of its position in the context of a reassessment and maintains it even though the taxpayer has strong legal arguments, insuring the risk of litigation before the courts could, in the future, free companies from giving warranties with respect to this type of long term litigation within the scope of a transaction.
Dean: The use of TLI by funds to ring fence operational risks within structures, such as questions around carried interest, treaty benefit, substance and transfer pricing is increasing across Europe. As is the use of policies when an enquiry has been raised by a tax authority and litigation is potentially pending.
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