In a recent analysis provided by Ana Helena Farinha and Tiago Martins de Oliveira from Cuatrecasas, the landscape of warranty and indemnity (W&I) insurance and tax insurance in Portugal has shown significant growth and adaptation to evolving market demands.
W&I insurance serves as a protective shield for investors, covering unforeseen risks linked with M&A transactions. Conversely, tax insurance shields investors against known tax risks, typically uncovered by W&I insurance due to their detectability during due diligence, routine business activities, or tax audits.
Despite these insurance solutions existing for several years, particularly mature in the US and UK markets, their utilization in Portugal has surged exponentially in recent times.
The Portuguese market framework has fostered this growth, with a continuing trajectory anticipated for the coming years.
The influx of M&A transactions involving international and experienced players accustomed to these insurance solutions has spurred the development of such products within Portugal and instilled confidence in them.
The growing complexity of Portugal’s tax landscape, fueled by recent changes leading to increased tax liabilities, has prompted investors to seek heightened protection.
This heightened demand stems from the enhanced sophistication of Portuguese tax authorities, leveraging big data and extensive cross-border information exchange, coupled with intensified tax assessments.
Emerging Risks in the Portuguese Market
In addition to traditional risks, Portugal is witnessing discussions and insurances against emerging risks. The number of policies and risk types has expanded notably.
One such risk is related to VAT in lease agreements, where Portuguese tax rulings have introduced ambiguities regarding VAT exemptions.
Moreover, concerns persist over the recharacterization of transfers of going concerns (TOGC) for VAT and stamp duty purposes, an area often covered by tax insurance policies.
Portugal’s real estate boom has also heightened interest in tax insurance concerning the participation exemption regime and transfer tax considerations.
Continued Growth in Insurance Use
The intricate tax landscape, coupled with uncertainties surrounding new tax rules and vigorous tax authority oversight, has driven increased demand for W&I and tax insurance policies.
These products have become cost-effective tools in M&A, facilitating deal negotiations and mitigating tax risks, replacing conventional mechanisms like price adjustments and indemnities.
Given the present economic and tax environment, the authors anticipate continued growth and awareness in these insurance markets, heralding further market activity and the emergence of new issues.
